F-1/A 1 d946689df1a.htm AMENDMENT NO. 4 TO FORM F-1 Amendment No. 4 to Form F-1
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As filed with the Securities and Exchange Commission on October 2, 2015

Registration No. 333-205242

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

to

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

DIGICEL GROUP LIMITED

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Bermuda   4812   N/A
(Province or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

Digicel Group Limited

Clarendon House

2 Church Street

Hamilton HM 11

Bermuda

+1 (441) 500-0099

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

Colm Delves
Chief Executive Officer

Digicel Group Limited
Clarendon House

2 Church Street

Hamilton HM 11

Bermuda

+1 (441) 500-0099

 

National Corporate Research, Ltd.

10 East 40th Street, 10th Floor

New York, New York 10016

(800) 221-0102

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Michael Kaplan
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
 

Marc D. Jaffe

Stelios G. Saffos
Latham & Watkins LLP
885 Third Avenue
New York, New York 10022
(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE1

 

 

Title Of Each Class Of Securities To Be Registered  

Amount

to be
registered(2)

 

Proposed
Maximum
Offering Price

Per Share

  Proposed
Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee(3)

Class A common shares, par value $0.01 per share

 

142,758,620

 

$16.00

 

$2,284,137,920

  $265,417

 

 

(1) Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) Previously paid.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED OCTOBER 2, 2015

PROSPECTUS

 

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Class A Common Shares

Digicel Group Limited

$             per share

 

 

This is the initial public offering of Digicel Group Limited. We are offering 124,137,931 of our Class A common shares. We have granted the underwriters an option to purchase up to 18,620,689 additional Class A common shares at the initial public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Upon consummation of this offering, we will have two classes of common shares, Class A common shares and Class B common shares. The rights of the holders of our Class A common shares and Class B common shares will generally be identical, except as to voting and conversion rights. Each Class A common share will be entitled to one vote. Each Class B common share will be entitled to ten votes and will be convertible at any time at the option of the holder into one Class A common share and will also convert upon transfer by a Class B holder (except in permitted transfers) and if the Class B common shares represent less than 10% of our total issued and outstanding common shares. See “Description of Share Capital.” Assuming no exercise of the underwriters’ option to purchase additional shares, the holders of our issued and outstanding Class B common shares, which include an entity controlled by Denis O’Brien, our founder and Chairman of the Board of Directors, will hold approximately 94.0% of the voting power of our issued and outstanding share capital following this offering.

We currently expect the initial public offering price to be between $13.00 and $16.00 per share. Our Class A common shares have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol “DCEL.”

 

 

Investing in our Class A common shares involves risks. See “Risk Factors” beginning on page 26.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $         $     

Proceeds to Digicel (before expenses)

   $         $     

 

(1) We have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting”.

The underwriters expect to deliver the Class A common shares to purchasers on or about                     , 2015.

 

 

Joint Bookrunning Managers

 

J.P. Morgan   UBS Investment Bank   Citigroup

 

Barclays   Credit Suisse   Deutsche Bank Securities

Lead Manager

Davy

                    , 2015


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We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither we nor the underwriters are making an offer to sell the Class A common shares in any jurisdiction where the offer or sale is not permitted. This offering is being made in the United States and elsewhere solely on the basis of the information contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the Class A common shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

For investors outside the United States: neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

TABLE OF CONTENTS

 

 

 

     Page  

Presentation of Financial and Other Information

     ii   

Industry and Market Data

     iii   

Trademarks

     iv   

Summary

     1   

The Offering

     17   

Summary Consolidated Financial and Operational Information

     20   

Risk Factors

     26   

Forward-Looking Statements

     57   

Use of Proceeds

     59   

Dividend Policy

     60   

Capitalization

     61   

Dilution

     63   

Selected Consolidated Financial and Operational Information

     64   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     69   

Industry Overview

     115   

Business

     118   

Regulation

     176   

Management

     189   

Certain Relationships and Related Party Transactions

     198   

Principal Shareholders

     202   

Description of Share Capital

     203   

Description of Our Indebtedness

     220   

Material Bermuda and U.S. Tax Considerations

     229   

Shares Eligible for Future Sale

     232   

Underwriting

     234   

Other Expenses of the Issuance and Distribution

     240   

Validity of Common Shares

     240   

Experts

     240   

Where You Can Find More Information

     240   

Service of Process and Enforcement of Judgments

     241   

Index to the Financial Statements

     F-1   

 

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Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “Digicel,” “DGL” or the “Company,” “we,” “our,” “ours,” “us” or similar terms refer to Digicel Group Limited and its subsidiaries.

 

 

Consent under the Exchange Control Act 1972 (and its related regulations) has been obtained from the Bermuda Monetary Authority (“BMA”) for the issue and transfer of our shares to and between residents and non-residents of Bermuda for exchange control purposes provided shares of the Company remain listed on an appointed stock exchange, which includes the New York Stock Exchange (the “NYSE”). In granting such consent, the BMA does not accept any responsibility for our financial soundness or the correctness of any of the statements made or opinions expressed in this prospectus.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

We report under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), and unless otherwise indicated, all financial data and discussions relating thereto in this prospectus are based upon financial statements prepared in accordance with IFRS, as issued by the IASB.

Non-IFRS financial measures

This prospectus contains non-IFRS financial measures, such as Adjusted EBITDA, Adjusted EBITDA margin, revenue on a Constant Exchange Rate (“CER”) basis, operating free cash flow and adjusted operating free cash flow, which are not recognized measures of financial performance or liquidity under IFRS, as issued by the IASB. We define Adjusted EBITDA for any period to be the sum of our consolidated net (loss)/profit, finance costs, net, share of losses of associates, impairments of investment in and loan to associates and other investments, taxation expense, compensation expenses relating to and costs of the voluntary separation program, foreign exchange (gain)/loss, share options and employee profit sharing schemes, (gain)/loss on disposal of assets, impairment of property, plant and equipment and depreciation and amortization. See “Summary—Summary Consolidated Financial and Operational Information” for a reconciliation of Adjusted EBITDA to net profit/(loss). We analyze revenue in currencies other than the U.S. dollar which is our reporting currency, on a CER basis, so that revenue growth can be considered excluding movements in foreign exchange rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Exchange Rate Risk”. Revenue on a CER basis is calculated by converting revenue in local currency for the relevant period using the prior period’s average foreign exchange rates and comparing to the prior period’s revenue. We define operating free cash flow as Adjusted EBITDA less purchases of property, plant and equipment, and adjusted operating free cash flow as operating free cash flow excluding capital expenditure relating to rollouts of our fiber networks to businesses and homes, the upgrade of acquired cable networks, Myanmar and building infrastructure, including our investment in a hotel in Haiti and the development of our Jamaican and Haitian headquarters. See “Summary—Summary Consolidated Financial and Operational Information” for a reconciliation of operating free cash flow and adjusted operating free cash flow to net profit/(loss) and cash flow from operating activities.

The non-IFRS financial measures presented are not measures of financial performance under IFRS, as issued by the IASB, but measures used by management to monitor the underlying performance of our business and operations and, accordingly, they have not been audited or reviewed. Further, they may not be indicative of our historical operating results, nor are such measures meant to be predictive of our future results. These non-IFRS measures are presented in this prospectus because management considers them important supplemental measures of our performance and believes that they and similar measures are widely used in the industry in which we operate as a means of evaluating a company’s operating performance and liquidity.

 

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However, not all companies calculate non-IFRS financial measures in the same manner or on a consistent basis. As a result, these measures may not be comparable to measures used by other companies under the same or similar names. Accordingly, undue reliance should not be placed on the non-IFRS financial measures contained in this prospectus and they should not be considered as a substitute for operating profit, profit for the year, cash flow or other financial measures computed in accordance with IFRS, as issued by the IASB.

Rounding and negative amounts

Certain figures in this prospectus, including financial data, have been rounded. Accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an exact arithmetic aggregation of the figures which precede them.

Currency

In this prospectus, references to “U.S. dollars,” “dollars” or “$” are to U.S. dollars, references to “J$” or “Jamaican dollar” are to the Jamaican dollar, references to “kina” or “PGK” are to the Papua New Guinean kina, references to “TT$” or “Trinidad and Tobago dollar” are to the Trinidad and Tobago dollar and references to “euro” or “€” are to the euro.

INDUSTRY AND MARKET DATA

This prospectus contains historical economic and industry data, and forecasts of such data. This information has been obtained from industry publications, market research and other independent third-party sources. Industry publications generally state that the historical information they provide has been obtained from sources and through methods believed to be reliable, but that they do not guarantee the accuracy and completeness of this information. Similarly, market research, while believed to be reliable, has not been independently verified by the Company. Market and industry statistics are inherently predictive and subject to uncertainty and are not necessarily reflective of actual market or industry conditions. Such statistics are based on market research which itself is based on sampling and subjective judgments by both the researchers and the respondents, including judgments about what types of products and transactions should be included in the relevant market.

This prospectus also contains information about the markets in which the Company operates and its competitive position within those markets, including market size information. The Company is not aware of any exhaustive industry or market reports that cover or address the market for its services and products, partially reflecting the unique nature of the markets in which the Company operates. In assembling the data relating to its markets, the Company has relied on information about the Company and its competitors’ financial performance and information obtained in connection with public tender processes in which the Company has participated. The Company’s management believes that the market share information contained in this prospectus, which is largely from internal sources, provides fair and adequate estimates of the size of the markets the Company operates in and fairly reflects the Company’s competitive position within that market. However, this information has not been certified by independent experts, and the Company cannot guarantee that a third-party using different methods to assemble, analyze or compile market data would obtain or generate the same results. As a result, potential investors should be aware that the economic and industry data and forecasts and estimates of market data included in this prospectus may not be reliable indicators of the Company’s future results.

Population information, gross domestic product (“GDP”) and GDP per capita of a country or market where we have operations have been based on the online version of the CIA World Factbook (“World Factbook”), World Factbook, the United Nations Statistical Database, the French National Institute for Statistics and Economic Studies, the Dutch Central Agency for Statistics, Rijksdienst Caribisch Nederland, the International Telecommunications Union, GSMA Intelligence (a database of mobile operator data operated by the Groupe Speciale Mobile Association), the Economist Intelligence Unit, IHS Global Insight and the World Bank.

 

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Mobile market share refers to a share of all mobile subscribers in a particular market. Penetration rates for particular services are derived from third party sources.

In this prospectus, references to “Cable TV & Broadband” also include (i) our cable TV services, Digital Terrestrial Television (“DTT”) and direct-to-home satellite (“DTH”) services in Papua New Guinea and Tonga, (ii) our forthcoming internet protocol television (“IPTV”) services in Jamaica, Trinidad and Tobago and Barbados and (iii) the fixed telephony services and broadband services provided by Bermuda Telephone Company (“BTC”).

References to the Caribbean and Caribbean markets in this prospectus should be construed as including Digicel’s operations in the Caribbean, the region that consists of the Caribbean Sea, its islands, and the surrounding coasts, as well as Bermuda, El Salvador, Suriname, Guyana and French Guiana. References to the South Pacific and South Pacific markets in this prospectus should be construed as including Digicel’s operations in the South Pacific, the region that consists of the southern part of the Pacific Ocean, extending southward from the equator.

TRADEMARKS

We have proprietary rights to trademarks, service marks and trade names used in this prospectus which are important to our business. Solely for convenience, we have omitted the “®” and “™” designations for such trademarks, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its respective holder.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all the information you need to consider in making your investment decision. You should read carefully this entire prospectus, including the “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections, and our financial statements and the related notes included elsewhere in this prospectus. This prospectus includes forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.”

Our Business

We are a leading provider of communications services in the Caribbean and South Pacific regions. We provide a comprehensive range of mobile communications, Business Solutions, Cable TV & Broadband and other related products and services to retail, corporate (including small and medium-sized enterprises) and government customers.

Digicel currently provides mobile communications services to 13.6 million subscribers in 31 markets with an aggregate population of approximately 32 million people. We offer HSPA+ or long-term evolution (“LTE”) mobile technology (which we refer to as “4G”) in 30 markets and we hold the number one mobile market position in 21 markets, with a mobile subscriber market share of more than 50% in 20 markets, as determined by internal Company data. Digicel launched mobile services in Jamaica, our first market, in 2001 and became the market leader there within 15 months of launch, based on a strategy that Digicel has since replicated successfully across many of its markets. Our mobile subscriber base has grown from 0.4 million as of March 31, 2002 to 13.6 million subscribers as of March 31, 2015, representing a compound annual growth rate, or CAGR, of 32.3%.

We have leveraged our market-leading positions, brand, people, networks and distribution channels to expand our service offering to include the provision of Business Solutions to corporate and government customers in the 31 markets in which we provide mobile communications services. More recently, we have expanded our service offering to provide Cable TV & Broadband services to residential customers in nine markets, and are in the process of rolling out Fiber to the Home, or FTTH, networks in Jamaica, Trinidad and Tobago and Barbados. In addition, we are developing a range of innovative new products and services to further broaden our communications and entertainment platform and develop additional revenue streams. These products and services include advanced data and content services such as social media packages, music streaming, video streaming and our proprietary mobile applications.

In the year ended March 31, 2015, Digicel generated total revenue of $2.8 billion, an operating profit of $707.8 million, a net loss of $157.6 million and Adjusted EBITDA of $1.2 billion, representing an Adjusted EBITDA margin of 42.3%. For the three months ended June 30, 2015, Digicel generated total revenue of $669.7 million, an operating profit of $165.0 million, a net loss of $31.4 million and Adjusted EBITDA of $277.5 million, representing an Adjusted EBITDA margin of 41.4%. Digicel uses “operating free cash flow” and “adjusted operating free cash flow”, which are non-IFRS measures, to illustrate the underlying cash generation of its business and the calculation of these measures is set out in “Summary Consolidated Financial and Operational Information”. Digicel’s operating free cash flow was $548.5 million for the year ended March 31, 2015 and $737.7 million for the year ended March 31, 2014, which as a percentage of revenue was 19.6% for the year ended March 31, 2015 and 26.8% for the year ended March 31, 2014. For the three months ended June 30, 2015, and 2014, respectively, Digicel’s operating free cash flow was $88.8 million and $161.2 million, which as a percentage of revenue was 13.3% for the three months ended June 30, 2015 and 23.8% for three months ended June 30, 2014. Digicel’s adjusted operating free cash flow, which excludes certain non-recurring capital expenditures, was $814.1 million for the year ended March 31, 2015, and $804.1 million for the year ended

 



 

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March 31, 2014, and as a percentage of revenue was 29.1% and 29.2% for the years ended March 31, 2015 and 2014, respectively. For the three months ended June 30, 2015, and 2014, respectively, Digicel’s adjusted operating free cash flow, which excludes certain non-recurring capital expenditures, was $187.8 million and $207.7 million, and as a percentage of revenue was 28.0% and 30.6% for the three months ended June 30, 2015 and 2014, respectively. On an IFRS basis as presented in our consolidated financial statements, our cash flow from operating activities was $433.4 million in 2015 and $448.4 million in 2014. As a percentage of revenue, our cash flow from operating activities was 15.5% for the year ended March 31, 2015 compared to 16.3% for the year ended March 31, 2014. For the three months ended June 30, 2015, and 2014, respectively, our cash flow from operating activities was $68.5 million and $148.3 million. As a percentage of revenue, our cash flow from operating activities was 10.2% for the three months ended June 30, 2015 and 21.9% for the three months ended June 30, 2014. See “Presentation of Financial and Other Information” for a discussion regarding the use of Adjusted EBITDA, operating free cash flow and adjusted operating free cash flow as financial measures and “—Summary Consolidated Financial and Operational Information” for a reconciliation of our net profit/(loss) to Adjusted EBITDA and our cash flow from operating activities and net profit/(loss) to operating free cash flow and adjusted operating free cash flow.

The illustration below summarizes the markets in which Digicel currently provides mobile communications services:

 

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Digicel’s Evolution

Digicel is in the process of evolving from a pure mobile telecommunications company into a leading total communications and entertainment provider, while remaining focused on improving its competitive position in each of its markets by providing customers with access to better mobile technology, more innovative products, a superior customer experience and better value compared to Digicel’s competitors. This evolution includes the expansion of its product offerings through developing its Business Solutions services and entering Cable TV & Broadband businesses, which have lower penetration rates than the Mobile business in Digicel’s markets. See “Business” for further discussions of our business. As described further below, as part of this strategy, Digicel has completed a number of acquisitions of Cable TV & Broadband and content businesses. Digicel is also implementing plans for the greenfield launch of new businesses in these sectors. Digicel intends to tailor its strategy to the potential and characteristics of each market and customer segment, and to continue to employ strict levels of financial discipline and control.

Digicel Ecosystem

Digicel’s customer centric approach aims at using its brand as well as its knowledge of its customers and markets to operate a service platform which Digicel refers to as the “Digicel Ecosystem”. The Digicel Ecosystem promotes customer retention and aims to drive revenue growth by capturing customers’ spending on communications and entertainment across all of Digicel’s businesses. It is a platform to which new products and services can be added. Importantly, Digicel has developed a strategy around proprietary content, which includes SportsMax, with exclusive sports content options tailored to individual markets, Loop, a local news and content app that is currently the most downloaded news app in the Caribbean with 518,000 mobile downloads as of June 30, 2015, and mobile financial services through Digicel Mobile Money, Boom and Bima, which provide mobile banking and micro insurance services in various markets.

Digicel believes that there are significant synergies from offering a combination of Mobile, Business Solutions, Cable TV & Broadband and other related products and services. In particular, Digicel can leverage its existing brand, people, networks and distribution capabilities to initially support the development of each product line. In addition, Digicel’s FTTH and Fiber to the Business (“FTTB”), networks can be used to carry mobile data traffic, to support Digicel’s Business Solutions unit and to provide Cable TV & Broadband services.

 



 

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The graphic below depicts certain elements of the Digicel Ecosystem.

 

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Competitive Strengths

Digicel believes the following strengths have led to its success to date and will help it maintain its position as a leading provider of communications and entertainment services in its markets:

Digicel’s Leading Mobile Market Positions

Digicel has a mobile subscriber market share, as measured by its mobile subscribers as a percentage of the total mobile subscribers in the market, at or above 50% in 20 of the 31 markets in which Digicel provides mobile services (including a market share of 70% or more in Jamaica, Haiti and Papua New Guinea as at June 30, 2015) and Digicel is continuing to grow its market share in several markets. More than 50% of Digicel’s total mobile voice traffic across its markets, as measured by minutes, is on-net (calls among its subscribers). This is the most profitable type of mobile voice traffic for Digicel due to the fact that Digicel does not need to pay interconnect fees to third parties. Digicel’s leadership position in its markets minimizes the impact of mobile termination rate reductions. Digicel’s market position, distribution, customer knowledge and segmentation strategy allow it to launch plans, products and access customers with new products and services quickly.

 



 

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Digicel’s Network

During the three years ended March 31, 2015, Digicel made a strategic decision to invest $1.6 billion in capital expenditure (including the purchase of intangible assets but excluding acquisitions of businesses), representing 43.3% of Adjusted EBITDA over that period, to create a superior network infrastructure that it believes will facilitate and provide it with the capacity for future growth across Mobile, Cable TV & Broadband and Business Solutions. With approximately 6,060 cell sites, Digicel currently provides mobile coverage in all population centers in its markets using either global system for mobile communications (“GSM”), general packet radio services (“GPRS”), Enhanced Data rates for Global Evolution (“EDGE”) or 4G coverage. Approximately 5,600 towers on which these cell sites are situated are owned by Digicel, which significantly reduces payments to third parties in respect of tower leases. The expansion of its 4G coverage is a critical component of Digicel’s strategy, as it believes population-wide mobile coverage through a high-quality network has always been a key differentiator in Digicel achieving leading market positions. Digicel provides 4G coverage in 30 of its 31 markets through HSPA+ or LTE. Digicel also has significant spectrum positions across all of its markets with over 3 billion MHz-pops (defined as the amount of spectrum in Mhz per geography multiplied by the population of the region). This has enabled Digicel to increase its mobile customer base and expand the availability of new data and value-added services (“VAS”), allowing for further expansion of these services. Digicel has sought to optimize its investment in Cable Broadband technology through fiber network rollouts in certain markets. Digicel has built FTTB networks in certain areas of Haiti, Jamaica, Trinidad and Tobago, Barbados and Papua New Guinea, which it expects to continue to extend, and it is in advanced stages of building FTTH networks in Jamaica, Trinidad and Tobago and Barbados. Digicel believes its fiber networks will support the provision of bandwidth intensive services and help ensure the future success of its business. In addition to its investment in capital expenditure, Digicel has also acquired Cable TV & Broadband companies in Anguilla, Nevis, Montserrat, Dominica, Turks and Caicos and Jamaica, two Cable TV services in Papua New Guinea and a subsea fiber network of 3,100 km connecting many of its Caribbean markets with each other and with the United States and entered into long-term Indefeasible Right of Use (“IRU”) agreements with third parties to secure additional subsea fiber capacity in both the Caribbean and South Pacific.

 



 

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The graphic below depicts Digicel’s owned network and purchased capacity in the Caribbean as of the date of this prospectus.

 

 

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The Digicel Brand

The Digicel brand is one of our most significant assets. We believe Digicel is known, among its subscribers, as a young, vibrant and fashionable company that has brought affordable, high-quality communications services to its markets, attracting a loyal clientele and serving areas and populations that have been historically underserved by its competitors. Through the use of extensive marketing tools, Digicel believes it has cultivated the image of an innovative service provider that successfully challenges incumbent providers and brings quality services, real choice and value to all market segments. Digicel has implemented a tailored, but consistent, marketing and branding strategy across its markets, while also applying a customized, grassroots marketing approach to individual communities within each market. Digicel believes its commitment to the communities in which it operates has resulted in a loyal clientele and that this commitment differentiates it from incumbent operators. In Jamaica, Haiti and Papua New Guinea, Digicel’s largest markets, Digicel is one of the most recognized consumer brands, with a top of mind rating of over 80% compared to 15% or less for its main competitor in each of those markets, and the strength of its brand positions it well to provide additional services to its customer base.

 



 

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Source: For Jamaica, Haiti, T&T, and FWI, research by Prodatos s.a.; for PNG, research by Tebbutt Research

1  Brand awareness defined as top of mind rating
2  Arithmetic average of Guadeloupe, Martinique and French Guiana
3  Arithmetic average of 18 other geographies

Digicel’s People

Digicel believes it has successfully developed a unique corporate culture based on entrepreneurship, customer focus and commitment to the communities it serves. Digicel has approximately 6,000 full time employees (predominantly non-unionized) across its geographies, with over 95% locally staffed. Digicel has a proven track record of success in emerging markets and has developed unparalleled experience in launching and building leadership positions in new markets, as well as successfully integrating acquisitions across its markets. Digicel has a strong, highly experienced and committed team in each of its markets, including expatriates with years of experience in the telecommunications industry and local professionals with deep knowledge of its markets. The executive management team is comprised of individuals with the depth and breadth of experience that Digicel believes is necessary to continue to expand its operations, build new networks, launch new products and integrate recent acquisitions as well as potential future acquisitions. Digicel believes its management team has a strong execution track record, having successfully developed the business through both geographic expansion into 30 new countries between 2003 and 2011 and also product expansion, including the development of Digicel’s Business Solutions, Cable TV & Broadband, and Diaspora businesses. Digicel continuously supplements its teams with the resources required to develop new growth areas, such as Cable TV & Broadband, Business Solutions and data monetization. In addition, Digicel’s Chairman, Denis O’Brien, and its Board of Directors have a proven track record in forming and successfully managing telecommunications companies in competitive markets around the world.

Digicel’s Diaspora Platform

In addition to providing its subscribers an ability to top-up their accounts in its markets, Digicel provides, through its Diaspora community initiatives, subscribers and their families the ability to purchase mobile top-up remotely for the use of its subscribers from targeted wire transfer locations in the United States, which has a large immigrant community of Jamaicans and Haitians, and the United Kingdom, which has a large immigrant community of Jamaicans. Digicel has also launched Diaspora in Canada, Australia and New Zealand. Digicel’s Diaspora business targets a population of approximately 10 million immigrants living in these countries and an estimated remittances market of approximately $9.0 billion. By marketing directly to this diaspora, Digicel can drive international calling and allow these communities to “gift” top-up to people in their markets. To develop our Diaspora product, we have established a Miami-based team and marketing presence in New York, Los Angeles, Canada and London. Digicel has created a modular system that allows for easy deployment in other geographies. Digicel estimates that its Diaspora business currently has a presence in over 27,000 retail stores across the countries where it operates. In addition, the Digicel Diaspora top-up app has been downloaded 445,000

 



 

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times. The value of recharge or top-up from Digicel’s Diaspora business has grown from $26 million for the year ended March 31, 2010 to $128 million for the year ended March 31, 2015, representing a CAGR of 37.5%. For the three months ended June 30, 2015, the value of recharge or top-up from the Diaspora business has grown to $36 million from $31 million for the three months ended June 30, 2014, representing an increase of 16.1%.

Digicel’s Differentiated Customer Experience

Digicel believes its focus on providing innovative service offerings and superior customer care results in a more rewarding customer experience and a high degree of customer loyalty. Digicel has developed a deep knowledge of its customers which it uses to provide them with attractive features and plans to meet their needs and budgets. Digicel has introduced many innovative products and features to the Caribbean and South Pacific regions, including online bill viewing, rollover minutes, online recharging of prepaid services, bill payment, mobile financial services and higher speed data services. Digicel was the first mobile operator in the region to provide customer care 24 hours a day, seven days a week and has been voted “best overall customer service provider” on a consistent basis in Jamaica in a survey conducted by an independent research body. Digicel has extensive customer reach through 1,034 retail locations (including 667 exclusive stores) and a dealer and distributor network with approximately 183,000 recharge locations. Digicel believes its track record of providing a differentiated and innovative service to its mobile customers will assist it as it expands its product offering to grow related areas including Cable TV & Broadband and Business Solutions.

Digicel’s Operating Efficiency, Cash Flow and Returns

Digicel’s management team is experienced in the implementation of best practices across each of its markets in order to successfully execute strategies to launch new products and services and reduce costs. Digicel’s continuous focus on streamlining its operations and improving efficiency has contributed to Digicel consistently maintaining its Adjusted EBITDA margins above 40% with an Adjusted EBITDA margin for the year ended March 31, 2015 of 42.3% and an Adjusted EBITDA margin for the three months ended June 30, 2015 of 41.4%. Digicel’s operational excellence is complemented by its ability to selectively deploy its capital in areas which it believes represent attractive opportunities to generate strong returns over time and increase cash flow conversion. On an IFRS basis as presented in our consolidated financial statements, our cash flow from operating activities was $433.4 million in 2015 and $448.4 million in 2014. As a percentage of revenue, our cash flow from operating activities was 15.5% for the year ended March 31, 2015 compared to 16.3% for the year ended March 31, 2014. For the three months ended June 30, 2015, and 2014, respectively, our cash flow from operating activities was $68.5 million and $148.3 million, which as a percentage of revenue was 10.2% compared to 21.9% for the three months ended June 30, 2015 and 2014, respectively. Digicel’s operating free cash flow was $548.5 million for the year ended March 31, 2015 and $737.7 million for the year ended March 31, 2014, which as a percentage of revenue was 19.6% for the year ended March 31, 2015 and 26.8% for the year ended March 31, 2014. For the three months ended June 30, 2015, and 2014, respectively, Digicel’s operating free cash flow was $88.8 million and $161.2 million, which as a percentage of revenue was 13.3% for the three months ended June 30, 2015 and 23.8% for three months ended June 30, 2014, respectively. As a non-IFRS measure of performance, Digicel calculates “operating free cash flow” as Adjusted EBITDA less expenditure on property, plant and equipment. When adjusted to exclude capital expenditure relating to rollouts of its fiber networks to businesses and homes, the upgrade of acquired cable networks, Myanmar and building infrastructure, including its investment in a hotel in Haiti and the development of Digicel’s Jamaican and Haitian headquarters, Digicel’s adjusted operating free cash flow was $814.1 million for the year ended March 31, 2015, and $804.1 million for the year ended March 31, 2014, and as a percentage of revenue was 29.1% and 29.2% for the years ended March 31, 2015 and 2014, respectively. For the three months ended June 30, 2015, and 2014, respectively, Digicel’s adjusted operating free cash flow was $187.8 million and $207.7 million, and as a percentage of revenue was 28.0% and 30.6% for the three months ended June 30, 2015 and 2014, respectively. See “Presentation of Financial and Other Information” for a discussion regarding the use of Adjusted EBITDA, operating free cash flow and adjusted operating free cash flow as financial measures and “—Summary

 



 

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Consolidated Financial and Operational Information” for a reconciliation of our net profit/(loss) to Adjusted EBITDA and our net profit/(loss) and cash flow from operating activities to operating free cash flow and adjusted operating free cash flow.

Digicel’s Strategy

Digicel is focused on maintaining and improving its position in each of its markets by providing its customers with wider mobile coverage, more innovative products and features, a superior customer experience and better value compared to its competitors. In parallel, Digicel’s objective is to be the leading communications and entertainment platform in each of the markets it serves. Digicel has expanded its product offering to include Business Solutions and it is growing its presence in Cable TV & Broadband which Digicel believes represent attractive growth opportunities. Digicel tailors its strategy to the relative potential and characteristics of each market and employs strict levels of financial discipline and control.

The key elements of its strategy consist of the following:

Make available to Digicel’s Customers the Best Infrastructure in the Market

To date, Digicel believes that it has differentiated itself with its customers as a result of having superior mobile networks which have extensive population coverage and use advanced technologies such as 4G and LTE. Where Digicel believes the return on investment is appropriate, it will continue to expand the coverage and capacity of those networks to facilitate the efficient delivery of connectivity along with innovative data/VAS and content services to its mobile customer base. Furthermore, as part of its evolution to a total communications and entertainment provider, Digicel is investing in hybrid fiber-coaxial, or “HFC”, FTTH and FTTB networks, both organically and through acquisitions, in order to expand its presence in the market for Business Solutions and Cable TV & Broadband services. Where Digicel expands organically, it is not encumbered by any legacy networks and typically invests in infrastructure, such as FTTH and FTTB, which it believes will help ensure the long-term future success of its business. Digicel sees a strategic fit and synergies from the combination of mobile, Cable TV and high-speed fiber networks and it expects to take a disciplined approach to deploying capital to ensure that its infrastructure will allow it to provide a differentiated and competitive service to its customers.

Leverage Digicel’s Platforms to Promote Growth of Digicel’s Business Solutions Unit

Digicel seeks to grow its revenue from information and communications technology, or “ICT”, services through its Business Solutions unit. It believes that this is a growing business in its markets where businesses are beginning to see the benefits of increased investment in ICT. The mobile markets in which Digicel operates have reached comparable levels of mobile penetration with more developed markets and, similarly, Digicel expects the level of demand for ICT in its markets to increase.

The management believes wireless network infrastructures supported by next generation fixed cable and fiber infrastructure, where present, ideally positions Digicel to service increasing demand arising from corporate (including small and medium-sized enterprises) customers and Government entities and to benefit from the convergence of fixed and mobile usage.

Telecommunications and Business Solutions services to corporations (including small and medium-sized enterprises) represent a significant market across the world. For example, according to McKinsey & Company (“McKinsey”), the estimated revenues for the calendar year 2015 generated by the combination of Business to Business Information Technology (“IT”) Services and Business to Business Telecommunications services (in

aggregate, the types of services Digicel provides in its Business Solutions business) will be, as a percentage of GDP, approximately 3.0% in the U.S. and Canada, 2.6% in Western Europe, 2.6% in Middle East and Africa and 1.8% in Latin America.

 



 

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Applying the world average of 1.9% of GDP to the aggregate GDP in Digicel’s markets suggests that the addressable opportunity in its markets for Business Solutions could total revenues of up to $3 billion.

Digicel’s Business Solutions unit leverages its brand, market knowledge, networks, distribution and tailored solutions to stimulate demand among local businesses and government entities in its markets and develop their understanding of ICT and the benefits it can provide to their operations. Since rolling out its Business Solutions services, Digicel believes it has, in some instances, expanded the target market by offering high-quality products and services that were previously unavailable or unaffordable within its markets. Digicel provides services such as cloud backup, cloud hosted subscriber phone system (“PBX”), managed services and networking and mobility solutions to Government entities and corporations (including small and medium-sized enterprises) in all of its markets. To support the expansion of its Business Solutions business, Digicel now has 312 dedicated professionals in this business area. Business Solutions revenue represents high margin business and, in addition to its FTTB networks, the Business Solutions services can leverage Digicel’s other infrastructure in undersea and other fiber networks.

Add Services to Digicel’s Platform and Foster the Digicel Ecosystem

Digicel continuously introduces new innovative products and services for its customers. This includes developing more advanced data and content services such as social media packages, music streaming and Digicel’s proprietary applications. Mobile VAS represented approximately 31.2% of mobile service revenue in the year ended March 31, 2015, compared to 27.4% for the year ended March 31, 2014 and 23.0% for the year ended March 31, 2013. For the three months ended June 30, 2015, Mobile VAS represented approximately 33.9% of mobile service revenue, compared to 30.6% for the three months ended June 30, 2014. Digicel believes that there are opportunities for it to continue to grow its mobile data business as its smartphone penetration increases and Internet access becomes a more necessary aspect of its customers’ lives. Digicel also believes that there is significant room to expand its Diaspora business, with a target immigrant population of approximately 10 million people and an estimated remittances market of approximately US $9.0 billion. Digicel will continue to be innovative with respect to its offering and will capitalize on opportunities presented by the increasing structural convergence of fixed line and mobile services and the increased demand for content and applications across both mobile and fixed line. To stimulate demand for digital services in its markets, Digicel has invested in Cable TV & Broadband infrastructure (including the rollout of FTTH in Jamaica, Trinidad and Barbados) and has entered into certain contracts for programming content, some of which is exclusive to Digicel. By extending Digicel’s core mobile voice and data platform to Cable TV & Broadband, applications and content, it is creating an overall “Digicel Ecosystem” of services and products that promote customer retention and revenue growth.

Continue to Improve Operating Efficiencies

Digicel will continue to seek ways of improving its operating efficiency and cash flow generation. By fostering the development of the “Digicel Ecosystem”, it will seek to leverage its existing network, brand, people, networks and distribution channels to add new products and services to its platform. As Digicel continues its evolution to a total communications and entertainment provider and the convergence of fixed and mobile services increases, it will focus on maintaining and growing its operating margins through increasing economies of scale and scope. Digicel continuously reviews its cost structure and has successfully implemented cost saving initiatives and it will aim to replicate this in future.

Explore Investment Opportunities

With its proven track record of launching in new markets and integrating acquired operations, Digicel seeks to generate shareholder value through a disciplined acquisition strategy and proven integration capabilities. Digicel deploys capital across its portfolio through value enhancing acquisitions with the aim of generating strong cash flow and operational synergies. Digicel seeks to create value by implementing operational

 



 

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improvements and leveraging economies of scale and scope, as well as pursuing in-market consolidation and attractive diversification with Business Solutions, Cable TV & Broadband, and digital opportunities. Digicel’s decision to enter into a new market or invest in new revenue streams and technology is based on, among other factors, an in-depth evaluation of the size of market, penetration levels, communications infrastructure, economic and regulatory environment, strength of existing service providers and its ability to obtain an attractive return on its investment. In addition, Digicel has sought to explore opportunities in certain markets in which Digicel does not have a mobile operating license but which have similar characteristics to its current markets. Consistent with this strategy, Digicel continually explores and engages in discussions concerning potential acquisitions, some of which may be material.

The Digicel Foundations

Among the charitable organizations through which Digicel provides ongoing support to local communities are the Digicel Foundations. The Digicel Foundations are non-profit organizations that distribute and utilize funds on a charitable basis for the sole purpose of building communities and community spirit in the countries of Jamaica (founded in 2004), Haiti (founded in 2007), Papua New Guinea (founded in 2008) and Trinidad and Tobago (founded in 2012). These foundations are administered by a separate management team and report to their own board of directors. The Digicel Foundations focus particularly on youth-oriented programs and projects that encourage self-sufficiency in the local community. To this end the Digicel Foundation in Haiti has built 150 schools across the country and the Digicel Foundation in Papua New Guinea has built 450 classrooms across the country. Digicel’s operating companies in these markets make annual donations to their local Digicel Foundation. The Digicel Foundations also raise funds from other sources. Many of Digicel’s employees work with the Digicel Foundations and serve on their boards to assist communities by contributing their time, expertise and leadership to projects in the local community. Digicel believes these initiatives have strengthened its ties with the local communities in these markets.

Recent Developments

Dispositions

Myanmar Tower Company

On October 2, 2015, Digicel entered into a Share Purchase Agreement with respect to the sale of its 75% shareholding (the “Myanmar Shares”) in Digicel Asian Holdings Pte Ltd. (“DAH”), the parent of Digicel Myanmar Tower Company Limited (“MTC”), and associated shareholder loans to Edotco Investments (Labuan) Limited (the “Myanmar Sale”). Closing of the Myanmar Sale is currently expected to occur by November 30, 2015, and the closing is conditioned upon customary closing conditions, including the approval of the government of the Republic and Union of Myanmar (including the Posts and Telecommunications Department thereof) and Bank Negara Malaysia and the consent of YSH Finance Limited, the minority shareholder in DAH. The headline purchase price for the Myanmar Shares) is $165.75 million, with cash proceeds to Digicel (after customary cash, working capital, capital expenditure and debt adjustments) expected to be approximately $125.0 million, with net proceeds of approximately $120.0 million to Digicel after additional transaction costs. The sale is expected to result in a gain on disposal of approximately $60.0 million. MTC generated approximately $5.9 million revenue and net profit of $0.4 million for the quarter ended June 30, 2015.

Acquisitions

Sky Pacific (Fiji)

On September 18, 2015, Digicel entered into a Business Purchase Agreement with Fiji Television Limited to acquire the assets related to the “Sky Pacific” business including the customer contracts, brand and related trademarks. Sky Pacific is a satellite-delivered, direct-to-home pay TV service based in Fiji and covering 13 island countries in the South Pacific including, American Samoa, Cook Islands, Fiji, Kiribati (East), Nauru, New Caledonia, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu. Sky Pacific currently has

 



 

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23,000 RGU’s. The transaction is expected to close by the end of September 2015. Digicel believes this acquisition will add to the entertainment options available to its customers in its South Pacific markets and enable Digicel to grow this business as part of its evolution into a total communications and entertainment provider in all of its markets.

AllcomMCR (Papua New Guinea)

On July 29, 2015, Digicel acquired the entire share capital of AllcomMCR PNG Limited (“Allcom”), which is a leading ICT business in Papua New Guinea. The acquisition of Allcom, which generated revenues of approximately $3.1 million for the five month period ended May 30, 2015, complements Digicel’s Business Solutions offering in Papua New Guinea.

Uniqa (Suriname)

On June 30, 2015, Digicel signed an agreement to acquire 100% of the shares of United Telecommunication Services Suriname N.V., which owns 99.993% of International Telecommunication Suriname N.V., a mobile operator in Suriname which trades under the “Uniqa” brand and holds the number three mobile market position. Digicel intends to integrate Uniqa’s mobile customer base into its existing operations in Suriname. Uniqa generated revenues of approximately $4.4 million for the year ended December 31, 2013, the most recent year for which audited financial statements are available and has mobile subscribers of approximately 5,000 as of the date of this prospectus. As of the date of this prospectus, the Uniqa transaction has not been completed and is not consolidated in Digicel’s financial statements for the same period.

BTC (Bermuda)

On June 1, 2015, Digicel completed the acquisition of 100% of BTC. BTC is currently the leading fixed telephony provider in Bermuda and also provides cable broadband services. BTC’s core network is fiber, with Digital Subscriber Lines (“DSL”) lines available to approximately 100% of the households in Bermuda. BTC generated revenues of $45 million for the year ended March 31, 2014, the most recent year for which audited financial statements are available. Digicel believes the quality of the assets it has purchased will allow it to overlay fiber into households in the future to provide a platform for offering high-speed broadband and Cable TV services to subscribers in Bermuda.

Voluntary Separation Program

In March 2015, Digicel announced a Voluntary Separation Program aimed at reducing staff numbers as part of its ongoing efforts to streamline operations and realign its resources to reflect its focus on evolving to a total communications and entertainment provider. Digicel recognized $14.4 million in separation costs in the year ended March 31, 2015 in connection with the program.

 



 

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Group Structure

Digicel is the parent company of a group of operating companies. The chart below depicts Digicel’s simplified corporate structure as of the date of this prospectus.

 

LOGO

 

Note:

(1) Represents DGL’s consolidated ownership on a fully diluted basis including shares held in Digicel Holdings (Central America) Ltd through Digicel Limited.
(2) Does not show minority interests in Caribbean Operations, Pacific Operations or Myanmar Tower Company.

Our Markets

Digicel operates across a diverse range of markets, products, demographics, regulatory regimes and currencies, which has reduced its dependence on any individual operation.

In the year ended March 31, 2015, its operations in Papua New Guinea, Haiti, Jamaica, Trinidad and Tobago and the French West Indies contributed 66.8% of its total revenue (17.9, 17.1, 15.1%, 9.6% and 7.1%, respectively) and its remaining markets contributed 33.2% of its total revenue. For the three months ended June 30, 2015, Digicel’s operations in Papua New Guinea, Haiti, Jamaica, Trinidad and Tobago and the French West Indies contributed 64.7% of its total revenue (16.8%, 17.0%, 14.7%, 9.8% and 6.4%, respectively) and its remaining markets contributed 35.3% of its total revenue.

 



 

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The following table shows certain information for each of the markets in the Caribbean and South Pacific regions in which Digicel provides mobile telecommunications services. The markets are listed in the order of the date in which Digicel entered each market(1).

 

Market

  Estimated
Population
(in thousands)(2)
    GDP
Per
Capita
($)(3)
    Estimated
Fixed Line
Penetration
(%)(4)
    Estimated
Fixed
Broadband
Penetration
(%)(5)
    Estimated
Mobile
Penetration
(%)(6)
    Number
of Mobile
Operators
(8)
    Digicel’s
Mobile
Market
Share
(%)(8)
    Digicel’s
Mobile
Market
Position
(8)
 

Jamaica

    2,930        8,287        28        15        102        2        72        1   

St. Lucia

    163        8,233        50        37        116        2        68        1   

St. Vincent and the Grenadines

    103        7,239        58        44        115        2        63        1   

Aruba

    111        22,736        97        53        135        3        34        2   

Grenada

    110        7,617        79        50        126        3        60        1   

Barbados

    290        14,765        170        78        108        2        57        1   

Cayman Islands

    55        40,973        152        84        168        2        47        2   

Curaçao

    147        38,138        66        73        128        2        55        1   

Anguilla

    16        10,904        122        87        182        2        54        1   

Dominica

    73        6,998        52        32        130        2        54        1   

St. Kitts and Nevis

    52        15,755        95        66        142        3        47        2   

Antigua and Barbuda

    91        13,539        108        13        127        3        54        1   

Bermuda

    70        80,184        286        146        144        2        52        1   

French Guiana

    250        16,891        94        69        131        4        40        2   

Guadeloupe

    406        21,976        117        88        158        4        40        2   

Martinique

    386        23,987        114        82        152        4        40        2   

Trinidad and Tobago

    1,224        24,209        69        46        145        2        56        1   

Haiti

    9,997        892        2        —          69          76        1   

Bonaire

    18        19,780        n/a        n/a        189        3        76        1   

Turks and Caicos

    49        14,393        n/a        n/a        114        2        58        1   

El Salvador

    6,126        4,104        64        19        136 (7)      4        16        4   

Guyana

    736        4,272        73        17        69        2        60        1   

Suriname

    573        9,197        58        25        161        3        48        2   

British Virgin Islands

    33        33,507        97        49        188        3        47        1   

Montserrat

    5        11,290        129        51        88        2        25        2   

Samoa

    197        4,196        127        3        124        2        80        1   

Papua New Guinea

    6,553        2,457        10        1        41        2        97        1   

Tonga

    106        4,641        172        9        55        2        55        1   

Vanuatu

    267        3,057        10        1        50        2        69        1   

Fiji

    903        4,620        39        6        106        2        33        2   

Nauru

    9        6,324        0        —          86        1        100        1   
 

 

 

               

Total

    32,049                 
 

 

 

               

 

(1) The information contained in the table above is sourced from the online version of the CIA World Factbook, the United Nations Statistical Database, the French National Institute for Statistics and Economic Studies, the Dutch Central Agency for Statistics, Rijksdienst Caribisch Nederland, the International Telecommunications Union (“ITU”), GSMA Intelligence (a database of mobile operator data operated by the GSM Association), TeleGeography GlobalComms Database and the World Bank. Digicel operates in developing economies where official information, particularly about GDP, may not reflect all economic activity and the information in the table should be read in conjunction with other information relating to the markets in which Digicel operates contained in this prospectus. The information provided, particularly mobile penetration data, fixed line penetration data and broadband penetration data should be used as an indication of each country’s economic climate and level of penetration and not as absolute figures, since such information is subjective and cannot be measured with complete accuracy.

 



 

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(2) Source: online edition of the CIA World Factbook available at the time of publication, except for French Guiana, Guadeloupe, Martinique and Bonaire. The information presented above for French Guiana, Guadeloupe and Martinique is 2013 data obtained from the French National Institute for Statistics and Economic Studies. The information presented above for Bonaire is 2013 data obtained from the Dutch Central Agency for Statistics.
(3) Source: online edition of the CIA World Factbook except for French Guiana, Guadeloupe, Martinique and Bonaire. The GDP per capita is calculated by dividing the total GDP for each market (i.e., the “GDP (official exchange rate)” displayed in the online CIA World Factbook) by that market’s total population. The GDP information presented for French Guiana, Guadeloupe and Martinique is obtained from the French National Institute for Statistics and Economic Studies and is based on 2012 GDP data (the latest available and assumes an exchange rate of $1.11 per €1). This GDP data is divided by the population figure from (1) above. The GDP information presented for Bonaire is obtained from Rijksdienst Caribisch Nederland and is based on 2012 GDP data (the latest available). This GDP data is divided by the population figure from (1) above. The information above for Turks and Caicos, “TCI” is from the UN Statistical Database.
(4) Source: Estimated fixed line penetration is based on the estimated number of subscribers in the market divided by the estimated number of households in the market. The subscriber figures are sourced from ITU 2013 data, except for Curaçao, Samoa and Haiti which are sourced from TeleGeography GlobalComms Database for the first quarter of 2015. No data was available for Bonaire and TCI. The household data was sourced from online editions of official reports from the governments of each country.
(5) Source: Estimated fixed broadband penetration is based on the estimated number of subscribers in the market divided by the estimated number of households in the market. The subscriber figures are sourced from ITU 2013 data, except for Curaçao, Samoa and Haiti which are sourced from TeleGeography GlobalComms Database for the first quarter of 2015. No data was available for Bonaire and TCI. The household data was sourced from online editions of official reports from the governments of each country.
(6) Source: ITU 2013 data, except for Curaçao, Bonaire, French Guiana, Guadeloupe, Martinique, Samoa, Nauru and TCI. For Bonaire, French Guiana, Guadeloupe, Martinique, Samoa, Nauru and TCI the data presented is from GSMA Intelligence from Q4 2014. For Curaçao 2013 data from the World Bank, World Development Indicators database is presented (i.e., Mobile Cellular subscriptions per 100 people).
(7) In El Salvador management believes that the actual mobile penetration is lower than the 136% reported in ITU’s 2013 data as other operators in this market use a different definition of active subscribers. See “Industry and Market Data.”
(8) The data presented is based on internal Digicel information as of June 30, 2015 except for El Salvador where the data presented is based on the first quarter 2015 TeleGeography GlobalComms Database report for El Salvador.

In addition, Digicel also has a 75% shareholding in a tower company in Myanmar, which increases the number of markets in which Digicel operates to 32. On October 2, 2015, Digicel entered into a Share Purchase Agreement with respect to the sale of its 75% shareholding. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Myanmar Tower Company”. Furthermore, as of June 30, 2015, Digicel held a 44.97% interest on a fully diluted basis in Digicel Holdings (Central America) Ltd (“DHCAL”), which has operations in Panama.

Selected Risks

Investing in our Class A common shares involves substantial risk. Please read “Risk Factors” for a discussion of certain factors you should consider in evaluating an investment in our Class A common shares. Some of these risks include:

 

    general economic conditions, the fluctuations or devaluations of local currencies, government and regulatory policies and business conditions in the markets served by us and our affiliates and in markets in which we seek to establish operations;

 

    telecommunications usage levels, including traffic and customer growth;

 



 

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    competitive forces, including price pressures, technological developments and our ability to retain market share in the face of competition from existing and new market entrants;

 

    regulatory developments and changes, including, with respect to the level of tariffs, the terms of interconnection, customer access and international settlement arrangements and the outcome of litigation related to the regulatory process;

 

    the success of business, operating and financial initiatives, the level and timing of the growth and profitability of new initiatives, start-up costs associated with entering new markets, subscriber acquisition costs, costs of handsets and other equipment, the successful deployment of new systems and applications to support new initiatives and local conditions; and

 

    the availability, terms and use of capital, the impact of regulatory and competitive developments on capital outlays, the ability to achieve cost savings and realize productivity improvements, and the success of our investments, ventures and alliances.

Corporate Information

We are an exempted company with limited liability incorporated under the laws of Bermuda on February 5, 2007 and registered with the Registrar of Companies in Bermuda under registration number 39547. Our registered office is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda and our telephone number is +1 (441) 500-0099. Our website is www.digicelgroup.com. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

Share Exchange

On September 17, 2015 we effected the following (collectively the “Common Share Exchange”):

 

  (a) The $57,000,000 in authorized but unissued share capital of the Company comprising 57,000 preferred shares of par value $1,000 each, was redesignated and sub-divided into 5,700,000,000 common shares of par value $0.01 each;

 

  (b) Each of our issued common shares with a par value of $1.00 each was exchanged for two common shares of par value of $0.01 each and pursuant to section 40(1) of the Bermuda Companies Act 1981, the $88,249,000 difference in the aggregate par value in connection with such exchange of shares was recorded as contributed capital; and

 

  (c) The authorized share capital of the Company comprising 100,000,000 common shares of par value $1.00 each, was sub-divided into 10,000,000,000 common shares of par value $0.01 each.

The effect of the Common Share Exchange was to convert each issued and outstanding common share into two common shares. As a result, Digicel’s share options were modified so each option is now convertible into two shares at half the exercise price. The phantom share scheme was also modified to double the number of phantom shares in issue and to reduce the base price applicable to each grant of phantom shares by 50%. The changes to the share option plans and phantom share scheme were neither beneficial nor disadvantageous to option holders or holders of phantom shares and therefore had no impact on the expenses or liabilities recognized by the Company in respect of these plans.

The Company has reflected the effect of the Common Share Exchange (and the corresponding adjustments to Digicel’s share option plans and phantom share scheme) in the prospectus as if it had occurred at the beginning of the earliest financial period presented.

 



 

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THE OFFERING

 

Class A common shares offered by us

124,137,931 shares

 

Class A common shares to be issued and outstanding immediately after this offering

124,237,931 shares

 

Class B common shares to be issued and outstanding immediately after this offering

193,310,345 shares

Total Class A and Class B common shares to be issued and outstanding immediately after this offering

317,548,276 shares

 

Option to purchase additional shares

We have granted the underwriters a 30-day option to purchase up to an additional 18,620,689 Class A common shares.

 

Voting rights

Class A common shares are entitled to one vote per share.

 

  Class B common shares are entitled to ten votes per share.

 

  Holders of our Class A common shares and Class B common shares will generally vote together as a single class, unless otherwise required by law and in limited circumstances specified in our bye-laws. Denis O’Brien, our founder and Chairman of the Board of Directors, who after our initial public offering will beneficially own the Class B common shares, will control approximately 94.0% of the voting power of our issued and outstanding share capital and therefore will have the ability to control the outcome of most matters submitted to our shareholders for approval, including the election of our directors. See “Description of Share Capital”.

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $1.7 billion, assuming an initial public offering price of $14.50 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use approximately $1.3 billion of net proceeds from this offering to repay or retire our existing indebtedness and pay any breakage costs, including pre-payment premiums. The terms of Digicel Group Limited and Digicel Limited’s senior notes and the Murabaha Facility in respect of our operations in Myanmar only permit a prepayment with a premium. All of our other indebtedness (including the senior credit facilities) can be prepaid at any time without a premium (subject to customary breakage costs if prepayment occurs on a date other than an interest payment date).

 



 

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  We have not yet determined which debt we will repay and whether we will repay such debt through tender offers, open market repurchases or redemption, and we expect to make such decision following completion of the offering based on market conditions and trading levels of our debt at such time, while also taking into account interest cost, prepayment cost and maturity of our various debt instruments. As a result, we cannot quantify the amount of debt reduction, although we expect to retire between $1.2 billion and $1.3 billion of debt. For detailed information on the interest rates and maturity dates of our senior credit facilities and senior notes, see “Description of Indebtedness.”

 

  We intend to use the remaining net proceeds from this offering for general corporate purposes, including capital expenditures and acquisitions, although we have no current understandings, commitments or agreements to do so. We do not expect that any proceeds will be used to fund dividends to common shareholders.

 

Dividend policy

The proceeds of this offering are intended to be used for the purposes described in “Use of Proceeds” and are not intended to be used for a dividend payment. For the fiscal years ended March 31, 2013, 2014 and 2015, the Company has paid a regular quarterly dividend of $10 million per quarter and the Company’s current intention for fiscal year 2016, subject to the discretion of the Board of Directors and considerations discussed herein, is to pay dividends in line with its historical quarterly dividend. In future years, the Company intends to evaluate increasing its distributions to shareholders based on its operating free cash flow available to equityholders to the extent that doing so is consistent with its growth objectives, further development of its networks and value enhancing acquisitions. See “Dividend Policy”.

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors” and all other information set forth in this prospectus before investing in our Class A common shares.

 

NYSE symbol

“DCEL”

The number of our Class A and Class B common shares to be issued and outstanding immediately after this offering, and all other information in this prospectus (unless indicated elsewhere and except for historical financial information, which reflects the Common Share Exchange but not the share capital restructuring), reflects the effectiveness of the Common Share Exchange as described under “Summary—Share Exchange”; and a share capital restructuring in connection with this offering under which our 180,100,000 common shares will be reclassified into 100,000 Class A common shares and 180,000,000 Class B common shares, and our 193,000 Series A Perpetual Preferred Stock will be exchanged into 13,310,345 Class B common shares in connection with the offering (based on the midpoint of the price range on the cover of this prospectus; the actual number of shares to be issued upon exchange will equal the liquidation preference or nominal value of $193.0 million divided by the price to the public in this offering); but does not reflect:

 

    the underwriters exercise of their option to purchase 18,620,689 additional Class A common shares;

 



 

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    the issuance of up to 15,256,374 Class A common shares issuable upon the exercise of options outstanding on the date hereof at a weighted average exercise price of $16.78; or

 

    the issuance of up to 275,798 Class A common shares reserved for future issuance under incentive compensation plans as of the date hereof.

If the assumed initial public offering price was either $13.00 per share or $16.00 per share, which is the price range on the cover page of this prospectus, the number of Class B common shares issued upon exchange of our issued and outstanding 193,000 Series A Perpetual Preferred Stock would be 14,846,153 or 12,062,500 shares, respectively.

 



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATIONAL INFORMATION

The following tables set forth our summary historical financial and operational information for the periods set forth below and are derived from our unaudited interim consolidated financial statements and our audited consolidated financial statements, which are included elsewhere in this prospectus. The unaudited interim consolidated financial statements reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the three months ended June 30, 2015 are not necessarily indicative of results to be expected for the full year or any other period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Digicel’s Business—Acquisitions” and “Business” for more information about our acquisitions.

We report under IFRS, as issued by the IASB. We have made a number of acquisitions over the last several years and our consolidated financial statements include results of operations for the acquired entities from the date of acquisition. Digicel accounts for its investment in DHCAL as an associate in accordance with IFRS, as issued by the IASB.

The following summary data for the periods and as of the dates indicated are qualified by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, which are included in this prospectus.

 

     Three Month Period
Ended

June 30,
     Year Ended March 31,  
     2015     2014      2015      2014      2013  
    

(in millions, except share data, share numbers,
percentages and subscriber data)

 

Consolidated Income Statement Data:

             

Revenue

   $ 669.7      $ 678.6       $ 2,794.1       $ 2,753.6       $ 2,777.3   

Direct operating and subscriber acquisition costs

     (174.4     (183.1      (753.9      (743.7      (764.7

Other operating expenses

     (149.3     (142.6      (610.1      (543.6      (582.8

Staff Costs

     (79.4     (74.5      (317.0      (278.7      (264.5

Depreciation, amortization and impairment of property, plant and equipment and intangible assets

     (101.6     (93.5      (405.3      (395.2      (410.6
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Operating Profit

     165.0        184.9         707.8         792.4         754.7   

Finance Income

     0.2        0.8         2.7         16.9         2.9   

Finance Costs(1)

     (129.9     (184.6      (599.3      (505.1      (565.0

Share of Loss of Associates

     (6.5     (4.2      (21.1      (7.8      (2.2

Impairment of Loan to Associate and Investments

     (15.8             (58.7      (39.0      (176.0
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Profit Before Taxation

     13.0        (3.1      31.4         257.4         14.4   

Taxation

     (44.4     (49.4      (189.0      (213.9      (212.9
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net (Loss)/Profit

   $ (31.4   $ (52.5    $ (157.6    $ 43.5       $ (198.5
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 



 

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     Three Month Period
Ended

June 30,
    Year Ended March 31,  
     2015     2014     2015     2014     2013  
    

(in millions, except share data, share numbers,
percentages and subscriber data)

 

Basic and diluted net (loss)/profit per share attributable to common shareholders(2)

   $ (0.19   $ (0.34   $ (1.04   $ 0.07      $ (1.27

Weighted average common shares used in computing net (loss)/profit per share—basic and diluted (in millions)(2)

     180.1        180.1        180.1        180.1        180.1   

Pro forma basic and diluted net (loss)/profit per share attributable to common shareholders(2)(3)

  

$

(0.10

    $ (0.53    

Weighted average common shares used in computing pro forma net loss per share—basic and diluted (in millions)(2)(3)

     317.5          317.5       

Consolidated Statement of Cash Flows:

          

Net cash provided by operating activities

   $ 68.5      $ 148.3      $ 433.4      $ 448.4      $ 561.1   

Net cash used in investing activities

     (257.7     (175.6     (865.6     (605.6     (415.7

Net cash provided by/(used in) financing activities

     1.5        159.8        280.2        (270.2     280.3   

Effects of exchange rate changes on cash and cash equivalents

     0.4        (0.2     (3.7     1.4        (0.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease)/increase in cash and cash equivalents

     (187.3     132.3        (155.7     (426.0     424.9   

Cash and cash equivalents at beginning of period

     499.8        655.5        655.5        1,081.5        656.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period(4)

   $ 312.5      $ 787.8      $ 499.8      $ 655.5      $ 1,081.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

          

Product Line Revenue

          

Mobile

   $ 570.6      $ 607.7      $ 2,439.0      $ 2,521.3      $ 2,583.9   

Business Solutions

     33.9        25.9        119.4        80.6        56.6   

Cable TV & Broadband

     15.4        3.9        31.6        11.6        3.1   

Other

     23.7        7.3        63.3        6.4        13.8   

Handset/Equipment

     26.1        33.8        140.8        133.7        119.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

   $ 669.7      $ 678.6      $ 2,794.1      $ 2,753.6      $ 2,777.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and Amortization

   $ 101.6      $ 93.5      $ 401.8      $ 395.2      $ 410.6   

Adjusted EBITDA(5)

     277.5        290.8        1,180.8        1,223.1        1,200.7   

Adjusted EBITDA Margin(6)

     41.4     42.9     42.3     44.4     43.2

Purchase of Property, Plant and Equipment(7)

   $ 188.7      $ 129.6      $ 632.3      $ 485.4      $ 345.7   

Purchase of Intangible Assets

     6.5        7.9        10.2        57.4        13.3   

Operating Free Cash Flow(8)

     88.8        161.2        548.5        737.7        855.0   

Operating Free Cash Flow as a percentage of revenue

     13.3     23.8     19.6     26.8     30.8

Adjusted Operating Free Cash Flow(9)

   $ 187.8      $ 207.7      $ 814.1      $ 804.1      $ 905.4   

Adjusted Operating Free Cash flow as a percentage of revenue

     28.0     30.6     29.1     29.2     32.6

Total Mobile subscribers (in thousands)(10)

     13,637        13,337        13,595        13,466        12,894   

ARPU (in $)(10)

   $ 14.3      $ 15.3      $ 15.3      $ 16.0      $ 16.2   

 



 

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     As of June 30, 2015
Pro Forma as
Adjusted(13)
    As of June 30,     As of March 31,  
       2015     2015     2014     2013  
    

(in millions)

 

Consolidated Balance Sheet Data:

      

Cash and cash equivalents(4)

   $ 712.5      $  312.5      $ 499.8      $ 655.5      $ 1,081.5   

Other Current Assets

     609.7        609.7        589.6        515.9        755.0   

Property, Plant and Equipment and Intangible assets, Net

     3,580.5        3,580.5        3,431.4        3,187.9        3,111.9   

Net Current Assets/(Liabilities)

     419.4        19.4        212.7        (723.8     685.9   

Total Assets

     5,028.7        4,628.7        4,641.4        4,440.5        5,034.7   

Total Debt(11)

     5,302.1        6,539.0        6,498.7        6,084.8        5,924.7   

Share Capital(12)

     2,020.0        307.8        307.8        307.8        307.8   

Total Deficit

     (1,314.0     (2,950.9     (2,857.8     (2,532.2     (1,754.2

 

(1) Includes interest expense, financing costs (including redemption premiums) and losses on foreign exchange movements on the translation of loans.
(2) See note 12 to our audited consolidated financial statements, which are included in this prospectus, for a description of the method used to calculate basic and diluted net loss per share applicable to common shareholders.
(3) Pro forma earnings per share basic and diluted is calculated giving pro forma effect to the (i) reclassification of our common shares into 100,000 Class A common shares and 180,000,000 Class B common shares and the exchange of our 193,000 issued and outstanding Series A Perpetual Preferred Stock into 13,310,345 Class B common shares in connection with the offering (based on the midpoint of the price range on the cover of this prospectus; the actual number of shares to be issued upon exchange will equal the liquidation preference or nominal value of $193.0 million divided by the price to the public in this offering) and (ii) the sale by the Company of 124,137,931 Class A common shares in this offering. The weighted average common shares used in computing pro forma net loss per share is 317,548,276. Pro forma earnings per share does not reflect the application of the expected use of proceeds of the offering. For additional information regarding the use of proceeds and potential impact on our future financial condition see “Use of Proceeds”.
(4) Excludes restricted cash of $17.7 million, $13.2 million and $290.3 million at March 31, 2015, March 31, 2014 and March 31, 2013, respectively, and $11.3 million at June 30, 2015. These amounts are included in Other Current Assets.
(5) We define Adjusted EBITDA for any period to be the sum of our consolidated net (loss)/profit, finance costs, net, share of losses of associates, impairments of investment in and loan to associates and other investments, taxation expense, compensation expenses relating to and costs of the voluntary separation program, foreign exchange (gain)/loss, share options and employee profit sharing schemes, (gain)/loss on disposal of assets, impairment of property, plant and equipment and depreciation and amortization. We believe that these adjustments represent income or expenses which either do not have any cash impact on the business, are non-recurring in nature or do not relate to the underlying operations of the business. We believe that Adjusted EBITDA provides meaningful additional information to investors since it is commonly reported and widely accepted by analysts and investors as a basis for comparing a company’s underlying profitability with other companies in its industry. This is particularly the case in a capital intensive industry such as wireless telecommunications. Adjusted EBITDA is used by the Board of Directors and management as a measure of profitability. However, Adjusted EBITDA is not an IFRS measure. You should not construe Adjusted EBITDA as an alternative to operating profit or loss or cash flow from operating activities determined in accordance with IFRS, as issued by IASB. Adjusted EBITDA is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same.

 



 

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The following table is a reconciliation of our net profit/(loss) to Adjusted EBITDA, operating free cash flow and adjusted operating free cash flow:

 

     Three Month Period
Ended June 30,
    Year Ended March 31,  
     2015     2014     2015     2014     2013  
    

(in millions, except percentages)

 

Net (Loss)/Profit

   $ (31.4   $ (52.5   $ (157.6   $ 43.5      $ (198.5

Finance Costs, Net

     129.7        183.8        596.6        488.2        562.1   

Share of Losses of Associates

     6.5        4.2        21.1        7.8        2.2   

Impairment of Loan to Associate and Investments

     15.8        —          58.7        39.0        176.0   

Taxation

     44.4        49.4        189.0        213.9        212.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     165.0        184.9        707.8        792.4        754.7   

Voluntary Separation Program Costs

     —          —          14.4        —         4.5   

Foreign Exchange Loss

     5.4        6.5        29.4        6.4        13.4   

Share Option and Employee Profit Sharing Adjustment

     5.6        6.5        22.9        27.5        14.9   

(Gain)/Loss on Disposal of Assets

     (0.1     (0.6     1.0        1.6        2.6   

Impairment of Property Plant and Equipment

     —          —          3.5        —         —    

Depreciation and Amortization

     101.6        93.5        401.8        395.2        410.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     277.5        290.8        1,180.8        1,223.1        1,200.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Purchase of Property, Plant and Equipment

     (188.7     (129.6     (632.3     (485.4     (345.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Free Cash Flow

     88.8        161.2        548.5        737.7        855.0   

Plus: Certain Excluded Capital Expenditure(8b)

     99.0        46.5        265.6        66.4        50.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Free Cash Flow

   $ 187.8      $ 207.7      $ 814.1      $ 804.1      $ 905.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin(6)

     41.4     42.9     42.3     44.4     43.2

 

(6) Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of our revenue.
(7) Excludes purchase price paid for acquisitions of businesses and is net of proceeds from the sale of Property, Plant and Equipment of $6.2 million, $9.6 million and $2.1 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively, and $0.6 million and $4.6 million for the three month periods ended June 30, 2015 and 2014, respectively.
(8) Operating free cash flow is calculated as Adjusted EBITDA less Purchase of Property, Plant and Equipment. Operating free cash flow is a Non-IFRS measure. Cash flow from operating activities is calculated in accordance with IFRS, as issued by IASB. You should not construe operating free cash flow as an alternative to operating profit or loss or cash flow from operating activities determined in accordance with IFRS, as issued by IASB. Operating free cash flow is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies.

 



 

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See footnote (5) above for a reconciliation of our net profit/(loss) to operating free cash flow and adjusted operating free cash flow. The following table is a reconciliation of our net cash provided by operating activities to operating free cash flow and adjusted operating free cash flow (as defined below):

 

     Three Month Period
Ended June 30,
     Year Ended March 31,  
     2015      2014      2015      2014      2013  
    

(in millions, except percentages)

 

Net Cash Provided by Operating Activities

   $ 68.5       $ 148.3       $ 433.4       $ 448.4       $ 561.1   

Interest Received

     (0.2      (11.1      (13.0      (6.7      (2.9

Interest Paid

     87.1         88.7         446.8         416.7         451.8   

Taxation Paid

     78.9         39.3         223.3         226.5         117.8   

Change in Operating Assets and Liabilities(a)

     37.8         19.1         46.5         131.8         55.0   

Voluntary Separation Program

     —           —           14.4         —           4.5   

Foreign Exchange Loss

     5.4         6.5         29.4         6.4         13.4   

Insurance Proceeds

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 277       $ 290.8       $ 1,180.8       $ 1,223.1       $ 1,200.7   

Less: Purchase of Property, Plant and Equipment

     (188.7      (129.6      (632.3      (485.4      (345.7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Free Cash Flow

     88.8         161.2         548.5         737.7         855.0   

Plus: Certain Excluded Capital Expenditure(b)

     99.0         46.5         265.6         66.4         50.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Operating Free Cash Flow(9)

   $ 187.8       $ 207.7       $ 814.1       $ 804.1       $ 905.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a) The “Change in Operating Assets and Liabilities” represents the movement in working capital assets in each financial period.
  (b) Capital expenditure relating to rollouts of Digicel’s fiber networks to businesses and homes, the upgrade of cable networks acquired, Myanmar and building infrastructure (including its investment in a hotel in Haiti and the development of Digicel’s Jamaican and Haitian headquarters). We exclude these expenditures because we view them as investments not related to our core business (Myanmar and building infrastructure) or because they reflect significant expansions of our current business rather than a reflection of ongoing capital expenditures directly related to the ongoing operation of the business.

 

(9) Adjusted operating free cash flow is calculated as operating free cash flow excluding capital expenditure relating to rollouts of Digicel’s fiber networks to businesses and homes, the upgrade of acquired cable networks, Myanmar and building infrastructure, including its investment in a hotel in Haiti and the development of Digicel’s Jamaican and Haitian headquarters. Such excluded capital expenditures were in aggregate $265.6 million, $66.4 million and $50.4 million for the years ended March 31, 2015, March 31, 2014 and March 31, 2013, respectively, and $99.0 million and $46.5 million for the three months ended June 30, 2015 and June 30, 2014, respectively. However, adjusted operating free cash flow is not an IFRS measure. You should not construe adjusted operating free cash flow as an alternative to operating profit or loss or cash flow from operating activities determined in accordance with IFRS, as issued by IASB. Adjusted operating free cash flow is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. See footnote (8) for a reconciliation of our net cash provided by operating activities to adjusted operating free cash flow and footnote (5) for a reconciliation of our net profit/(loss) to operating free cash flow and adjusted operating free cash flow.
(10) Mobile subscribers is defined as a customer who has made or received a chargeable event in the last 30 days, and ARPU is defined as monthly average revenue per mobile user. ARPU is calculated by dividing mobile service revenue and Business Solutions revenue for the month by the average mobile subscribers during that period. ARPU is different in each of Digicel’s markets and the mix of its subscribers in such markets will impact ARPU. For further discussion of our method of measurement of subscribers and ARPU, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Measures—Mobile Key Performance Indicators—Mobile Subscribers”

 



 

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(11) Total Debt is gross debt before deferred financing fees and accrued interest. It includes shareholder loans from minority shareholders to our subsidiaries. See “Description of Our Indebtedness”.
(12) Includes share premium and contributed capital.
(13) Reflects (i) the effectiveness of a share capital restructuring in connection with this offering under which our common shares will be reclassified into 100,000 Class A common shares and 180,000,000 Class B common shares and our 193,000 issued and outstanding Series A Perpetual Preferred Stock will be exchanged into 13,310,345 Class B common shares in connection with the offering (based on the midpoint of the price range on the cover of this prospectus; the actual number of shares to be issued upon exchange will equal the liquidation preference or nominal value of $193.0 million divided by the price to the public in this offering) and (ii) the sale by the Company of 124,137,931 Class A common shares in this offering and the application of the proceeds to repay approximately $1.2 billion of debt (if we were to repay debt with the highest prepayment premiums), assuming the Class A common shares offered by the Company are sold for $14.50 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, leading to reduced interest expense. The pro forma as adjusted balance sheet data is illustrative only and will change based on the actual initial public offering price, other terms of this offering determined at pricing and the specific tranches of debt determined to be repaid (see “Use of Proceeds”). Pro forma as adjusted balance sheet figures do not reflect the write-off of deferred unamortized financing fees in connection with the use of proceeds from this offering. Each $1.00 increase or decrease in the assumed initial public offering price of $14.50 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease each of cash and cash equivalents, total assets, total debt, share capital and total deficit, on a pro forma as adjusted basis, by approximately $119.2 million, assuming that the number of Class A common shares offered by Digicel, as set forth on the cover page of this prospectus, remains the same. Digicel may also increase or decrease the number of Class A common shares it is offering. Each increase or decrease by 1,000,000 Class A common shares offered by Digicel would increase or decrease each of cash and cash equivalents, total assets, total debt, share capital and total deficit by approximately $13.9 million, assuming that the assumed initial price to the public remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by Digicel. If the assumed initial public offering price was either $13.00 per share or $16.00 per share, which is the price range on the cover page of this prospectus, the number of Class B common shares issued upon exchange of our issued and outstanding 193,000 Series A Perpetual Preferred Stock would be 14,846,153 or 12,062,500 shares, respectively.

 



 

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RISK FACTORS

An investment in our Class A common shares involves a high degree of risk. You should carefully consider the following risks, together with other information provided to you in this prospectus, in deciding whether to invest in our Class A common shares. The occurrence of any of the events discussed below could have a material adverse effect on our business, results of operations or financial condition. If these events occur, the trading price of our Class A common shares could decline, and you may lose all or part of your investment. Additional risks not currently known to us or that we now deem immaterial may also harm us and affect your investment.

This prospectus contains “forward-looking” statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include those discussed below and elsewhere in this prospectus. See “Forward-Looking Statements.”

Risks Relating to Digicel’s Business, Technology and Competition

Digicel faces significant competition in each of the markets in which it operates and competitive pressures could have a material adverse impact on Digicel’s business.

Digicel faces competition from established and new competitors in each of the geographic markets and businesses in which it operates. The nature and level of the competition it faces varies for each of the products and services it offers. Digicel’s competitors include, but are not limited to, mobile, fixed-line, cable TV and broadband, subsea fiber and terrestrial fiber providers and information and communication technologies (“ICT”) service providers.

In some of Digicel’s markets, its competitors may have more advanced technology than Digicel, greater coverage area than Digicel, or both. Moreover, some of Digicel’s competitors have more extensive engineering, marketing, personnel and capital resources than Digicel does. The level of competition is influenced by the continuous and swift technological advances that characterize the industry, the regulatory developments that affect competition and alliances between market participants. For example, although number portability is not currently implemented in many of the markets in which Digicel operates, Digicel expects that this will be implemented in several of these markets over the coming years. The mobile telecommunications operators in each market compete for customers principally on the basis of services offered, price, marketing skills, quality and reliability of service and coverage area. Increased competition may result in pricing pressure, reduced margins and profitability, increased customer churn and the loss of revenue and market share. Price competition is especially significant on voice and short messaging services, which are largely commoditized, as the ability to differentiate these services among operators is limited. In the year ended March 31, 2015 and in the three months ended June 30, 2015, respectively, approximately 60.0% and 56.2% of Digicel’s total revenue was generated from mobile voice and, while its revenue from data/ VAS is increasing, there is uncertainty as to whether the future growth in such services will be sufficient to replace any declines in mobile voice services.

Cable & Wireless Communications Plc (“C&W”) is currently Digicel’s principal competitor in many of its markets. On March 30, 2015, C&W announced that it completed the acquisition of Columbus International Inc., a provider of cable TV and broadband enabled services and a wholesale provider of subsea and terrestrial fiber capacity in the Caribbean and Latin American regions. The approval of this transaction was subject to a number of regulatory conditions being imposed in various markets in which Digicel operates. Digicel will monitor the adherence process closely, as Digicel believes that the acquisition potentially has anti-competitive implications including (but not limited to) anti-competitive effects in the subsea fiber access market in the Caribbean region, monopoly control of cable TV, fixed-line and cable broadband services in certain markets and potential for abuses of dominant positions in certain relevant markets on the part of C&W.

Digicel also faces a variety of other international, regional and local competitors in many of the markets in which we operate. Consolidation within the telecommunications sector in the markets in which it operates could

 

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result in, among other things, competitors with greater scale operating aggressively in these markets. In addition, in many of Digicel’s markets, we compete against operators that are owned, partially owned or formerly owned by the local government or by the incumbent fixed-line provider, which may provide these competitors with competitive advantages not available to Digicel, including greater economies of scale, the ability to offer bundles of services and subsidies of the Mobile business with profits generated by the fixed-line business.

Additional licenses may be awarded in Digicel’s markets (especially in those markets with only two providers), which could increase competition. In addition, new competitors, such as cable companies that are able to leverage their existing networks to provide voice and data services, may enter the telecommunications markets and Digicel may face additional competition from other communications technologies that are being or may be developed in the future.

More generally, the rapid development of new technologies, services and products could impact Digicel’s business as a wide variety of potential new competitors, including other telecommunications operators, cable operators and Internet companies, enter the market. For example, the growth in Internet connectivity has led to new entrants offering Voice Over Internet Protocol, or “VOIP,” services or audio or video content services delivered over the Internet (referred to as “Over-The-Top” or “OTT” services), which provide additional competitive risks to aspects of Digicel’s business. Such operators could displace the services Digicel provides in wireless communication by using our customers’ Internet access (which may or may not be provided by Digicel) to enable the provision of voice calls and instant messaging services directly to Digicel’s customers. The growth in Internet connectivity will also likely enable the provision of content which may constitute an alternative to content provided by Digicel’s mobile applications or cable TV services.

Any failure by Digicel to compete effectively, or aggressive competitive behavior by Digicel’s competitors in pricing its services or acquiring new customers, would result in Digicel not being able to maintain or increase its market share, which would have a material adverse effect on Digicel’s revenue and results of operations and could result in a downgrade of Digicel’s credit ratings, which could restrict Digicel’s access to the capital markets.

Currency fluctuations or devaluations could reduce the amount of profit and assets that Digicel is able to report.

Digicel’s revenue is predominantly denominated in local currencies, such as the Jamaican dollar, the Haitian gourde, the Papua New Guinean kina, the Trinidad and Tobago dollar, the Eastern Caribbean dollar, the Bermudian dollar, the Cayman dollar, the Barbadian dollar, the Aruban guilder, and other local currencies, while the majority of Digicel’s long-term debt liabilities are denominated in U.S. dollars. Although the value of the Trinidad and Tobago dollar, the Barbadian dollar, the Eastern Caribbean dollar, the Aruban guilder, the Netherlands Antilles guilder (Curaçao), the Suriname dollar, the Cayman dollar and the Bermudian dollar are fixed to the U.S. dollar, Digicel can provide no assurance that this will continue. In January 2011, the Central Bank in Suriname devalued the exchange rate to the U.S. dollar by 16.4%. The Jamaican dollar, the Haitian gourde, the Papua New Guinean kina, the euro, the Guyanese dollar, the Samoan Tala, the Tongan pa’anga, the Vanuatu vatu, the Fijian dollar and the Australian dollar (in Nauru) fluctuate freely against the U.S. dollar, and any adverse fluctuations in these currencies may have an adverse impact on Digicel’s earnings, assets or cash flows. The currencies of certain markets in which Digicel operates can fluctuate significantly against the U.S. dollar. For example, for the year ended March 31, 2015, the average exchange rate for the year of the Jamaican dollar, the Papua New Guinea kina, the euro and the Haitian gourde into the U.S. dollar depreciated in value by 8.6%, 8.0%, 5.7% and 4.7%, respectively, as compared to the average exchange rate for the year ended March 31, 2014. These declines have continued to date since March 31, 2015. In the year ended March 31, 2015, approximately 13% of Digicel’s revenue was denominated in the Jamaican dollar, approximately 7% of Digicel’s revenue was denominated in the euro, approximately 13% of Digicel’s revenue was denominated in Haitian gourdes and approximately 17% of Digicel’s revenue was denominated in Papua New Guinean kina. For the three months ended June 30, 2015, approximately 12% of Digicel’s revenue was denominated in the Jamaican

 

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dollar, approximately 6% of Digicel’s revenue was denominated in the euro, approximately 13% of Digicel’s revenue was denominated in Haitian gourdes and approximately 17% of Digicel’s revenue was denominated in Papua New Guinean kina. A significant decrease in the value of a local currency relative to the U.S. dollar could have a material adverse effect on Digicel’s results of operations and financial condition.

Digicel seeks to reduce its foreign exchange exposure arising from transactions through a policy of matching, as much as possible, assets and liabilities. Digicel’s ability to reduce its foreign currency exchange exposure is limited by Digicel’s ability to borrow in local currency. Digicel cannot assure you that in the future it will be able to fund its capital expenditure needs as well as reduce Digicel’s foreign exchange exposure by borrowing in local currency. As a result, Digicel’s exposure to market fluctuations or devaluations would be exacerbated.

Most of Digicel’s subsidiaries receive revenue that is denominated in the local currency. The imposition of foreign exchange controls or the inability or delay in converting local currency to foreign currencies may have an adverse impact on its business and financial condition.

Most of Digicel’s subsidiaries receive substantially all of their revenue in the currency of the markets in which we operate. Digicel expects to derive substantially all of its revenue through funds generated by the operating subsidiaries and, therefore, Digicel will rely on the ability of the operating subsidiaries to transfer funds to Digicel. There are foreign exchange controls in some of the countries in which Digicel operates, which could significantly restrict the ability of these subsidiaries to pay interest and dividends and repay loans by exporting cash, instruments of credit or securities in foreign currencies, although Digicel has experienced no material difficulty in obtaining permits to allow Digicel’s subsidiaries to export cash to Digicel. There can be no assurances, however, that this will continue to be the case. In particular, our businesses in Papua New Guinea, Samoa and Fiji are subject to foreign exchange controls that could restrict Digicel’s ability to convert local currencies and repatriate funds. In addition, in some countries, it may be difficult to convert large amounts of local currency into foreign currency because of limited foreign exchange markets. The practical effect of this is likely to be time delays in accumulating significant amounts of foreign currency. In addition, a few countries in which Digicel operates restrict the export of cash in local currencies. There can be no assurance that additional foreign exchange control restrictions will not be introduced in the future or that Digicel’s ability to receive funds from its subsidiaries will not subsequently be restricted.

Digicel is dependent upon interconnect agreements, transmission agreements, leased line agreements and roaming agreements.

Digicel is dependent upon access to networks which are primarily controlled by the incumbent operators (many of which are current or former government-owned public telecommunications operators or competing fixed and/or wireless telephone operators). For example, Digicel has voice interconnect agreements with C&W (Digicel’s primary competitor in many of its markets) in many of the Caribbean markets in which Digicel and C&W both operate. Digicel also generally has interconnect agreements with other fixed and wireless providers in each of the markets in which Digicel operates. Some of Digicel’s interconnect agreements are presently due for renegotiation, including, for instance, in Guyana and Bonaire. In some markets, existing interconnection agreements may have expired, but they roll over on an ongoing basis in accordance with their express terms and industry practice.

Digicel’s failure to enter into or maintain acceptable interconnect agreements with fixed-line and other wireless service providers in each of the markets in which Digicel currently operates or will operate in the future could prevent Digicel’s subscribers from calling the subscribers of fixed-line and other wireless service providers in a particular market, which could restrict the growth of the wireless services in any such market and may have a material adverse effect on Digicel’s business and results of operations. Any failure or delay on the part of these telecommunication service providers in fulfilling their contractual or statutory obligations for a prolonged period of time could have a material adverse impact on cash flow available to Digicel’s subsidiaries and Digicel and, as a result, could adversely affect Digicel’s business, results of operations or financial condition.

 

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Furthermore, Digicel has received an increasing number of requests for interconnection from small locally domiciled carriers with domestic and/or international licenses. In most of Digicel’s markets there is a legal requirement to interconnect with other licensed carriers. Since these carriers have no or a very limited number of local subscribers, they could aggressively start to compete for incoming international calls by undercutting Digicel’s rates. This could materially reduce Digicel’s revenue on incoming international minutes.

In addition, Digicel’s results of operations are affected by the cost of transmission and leased lines to effect interconnection or in the provision of services generally to subscribers. There can be no assurance that Digicel will be able to maintain transmission or leased line agreements on appropriate terms to maintain or grow Digicel’s business. The increased usage of data services will require increased transmission capacity both within Digicel’s markets and also in and out of Digicel’s markets, primarily to the United States. There can be no assurance that Digicel will be able to maintain or increase transmission capacity on appropriate terms to maintain or grow Digicel’s business.

Regulators in all of Digicel’s markets have reduced, or are expected to consider reducing, interconnection rates. Because Digicel is often one of the larger suppliers of telecommunications services in the countries Digicel operates, and as such, typically a net recipient of interconnect payments, this could have the effect of materially reducing Digicel’s revenue.

Roaming is an important feature to many of Digicel’s subscribers. Subscribers can only access another telecommunications provider’s wireless network if that other provider allows them to roam on its network. Digicel relies on agreements with other wireless providers to provide roaming capability for Digicel’s subscribers. For many of Digicel’s customers the geographic scope of coverage and the rates Digicel charges for roaming are factors when selecting a wireless service provider. Roaming rates are regulated in the French West Indies under European Union regulation and may in the future be subject to regulatory review in Digicel’s other markets. In addition, the quality of service that Digicel’s customers have when roaming may be inferior to the quality of service that Digicel provides its customers and its customers may not be able to use the advanced features that they enjoy when making calls on their home networks. Some of Digicel’s competitors may be able to obtain lower roaming rates or more favorable roaming arrangements because of their affiliation with, or ownership by, other wireless service providers. Any perceived or actual differences in the quality of service, extent of roaming capability or cost of roaming as compared to Digicel’s competitors may result in a loss of subscribers, which could have a material adverse effect on Digicel’s business and results of operations.

Digicel’s mobile applications and Cable TV use content provided by third parties. Digicel may have difficulty securing such content and as a result, such content may not be accepted or widely used by Digicel’s customers.

Digicel acquires rights to certain services for use by its Mobile and Cable TV subscribers. Digicel makes long-term commitments relating to these rights in advance even though we cannot predict the popularity of the services or ratings the programming will generate. License fees may be negotiated for a number of years and may include provisions which require that Digicel must still pay part of the fees even if the service supplied is no longer popular.

The success of Digicel’s Cable TV services depends on its ability to access an attractive selection of television programming from content providers. The ability to provide movie, sports and other popular programming is a major factor that attracts customers to Cable TV services. Digicel may not be able to obtain sufficient high-quality programming from third-party producers for its Cable TV services on satisfactory terms or at all in order to offer compelling Cable TV services which could result in reduced demand for, and lower revenue and profitability from, its cable services. In addition, Digicel has mainly acquired the businesses which provide Digicel’s Cable TV services rather than developed these services in-house. There is a risk that if certain personnel in the acquired businesses leave their positions that Digicel’s management team will not have the required skills to negotiate satisfactory contracts relating to such content which would impact the competitiveness of Digicel’s offering.

 

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In certain cases, the businesses Digicel acquired may not have satisfactory contracts in place with the owners of such content which could complicate any ongoing or future contractual negotiations or lead to disputes with such parties including claims for copyright infringement.

The commercial success of applications or content also depends on the quality and acceptance of other competing applications or content released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time results from mobile data use, and Digicel’s Cable TV & Broadband business fluctuates primarily with the acceptance of such services by the public, which is difficult to predict. A shortfall, now or in the future, in the expected popularity of the various services for which Digicel has acquired rights could lead to a fluctuation in Digicel’s results of operations.

Digicel’s ability to maintain and to expand its telecommunications networks may be affected by disruption of supplies and services from its principal suppliers.

Digicel relies on a limited number of leading international and domestic communications equipment manufacturers to provide network and communications equipment and technical support. The key suppliers of equipment for Digicel’s existing networks are Ericsson, Huawei and Alcatel. The key supplier of Digicel’s handsets and accessories is Facey Telecom Commodity Company Limited, a distribution business that operates in the Caribbean, Central America and in the South Pacific (through its Oceanic Communications Limited joint venture), with whom Digicel has no affiliation or other relationship other than with respect to the supply and distribution of Digicel’s products. Facey Telecom supplies Digicel’s retail channel with handsets from, among others, Alcatel, Microsoft, ZTE, Samsung, LG, Sony, Blackberry, Huawei and HTC, which currently accounts for substantially all of the handsets and accessories supplied to Digicel. Digicel does not have operational or financial control over its key suppliers, and Digicel has limited influence with respect to the manner in which they conduct their businesses.

Digicel believes there are a number of alternative suppliers of handsets and accessories available to Digicel. Digicel’s agreement with Facey Telecom allows for the contract to be terminated by Digicel or by Facey Telecom upon four months’ written notice, and Digicel believes that we would be able to locate an alternative supplier or wholesale distributor within that notice period, although Digicel may suffer some disruptions or incur increased costs as a result. In the event that Digicel issues a notice of termination under its Facey Telecom contract, Digicel is required to purchase any remaining inventory that we have ordered from Facey Telecom at their acquisition price and make such payment within 14 days of the date of termination. However, if Digicel is unable to obtain adequate alternative supplies of equipment or services in a timely manner or on acceptable commercial terms, or if there are significant increases in the cost of these supplies, Digicel’s ability to maintain and to expand its telecommunications networks may be materially and adversely affected.

Substantially all of Digicel’s customers receive services from Digicel on a prepaid basis and therefore Digicel is exposed to higher risk of customer churn.

Prepaid customers, those customers that pay for service in advance through the purchase of wireless airtime, represented approximately 93.6% of Digicel’s subscribers at June 30, 2015. Prepaid customers do not sign fixed term service contracts, which make Digicel’s customer base more susceptible to switching wireless service providers. Termination of Digicel’s services by subscribers is referred to as churn. In addition, many of Digicel’s subscribers are first time users of wireless telecommunications services, who have a tendency to migrate between service providers more frequently than established users. To the extent Digicel’s competitors offer incentives to Digicel’s subscribers to switch wireless service providers, through subsidizing or giving away handsets or other promotions, the risk of churn will increase. In addition, in some of its markets Digicel may offer subscriber identity module (“SIM”) only promotions, where there is no subsidized handset or similar incentive provided to customers, and in some cases this could lead to higher churn as the cost of acquiring a new or additional SIM may be lower for customers. Further, many of the markets Digicel operates in have started to consider whether or not to implement number portability, which if implemented may negatively impact Digicel’s churn. Digicel’s

 

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inability to retain existing prepaid customers and manage churn levels could have a material adverse effect on Digicel’s business and results of operations. Digicel’s average levels of monthly churn for the years ended March 31, 2015, March 31, 2014 and March 31, 2013 were 5.0%, 4.3% and 4.2%, respectively. For the three months ended June 30, 2015 and June 30, 2014, Digicel’s average levels of monthly churn was 4.2% and 4.8%, respectively.

Digicel’s markets are characterized by rapid technological change, which could render its products obsolete and cause Digicel to make substantial expenditures to replace its products.

The Mobile and Cable TV & Broadband businesses that Digicel operates are capital intensive. Significant capital expenditures are required to add customers to its network. Digicel’s Business Solutions business leverages our existing network infrastructure supported by the rollout of FTTB networks in targeted areas. As new technologies develop, equipment may need to be replaced or upgraded or a network may need to be rebuilt in whole or in part, at substantial cost to Digicel, to remain competitive. For example, increased demand for bandwidth-intensive multimedia services will require Digicel to upgrade its mobile networks to third and fourth generation technologies that provide increased bandwidth and speed leading to a higher network cost per subscriber than in the past. Digicel has launched 4G technology in 30 of its markets, including LTE technology in Turks and Caicos, Antigua, the Cayman Islands, Fiji and Papua New Guinea. In addition, Digicel has acquired and is developing cable and fiber networks to expand its Cable TV & Broadband and Business Solutions businesses. Digicel’s customers expect that it will regularly introduce increasingly sophisticated telecommunications services which may require it to upgrade its networks and incur significant capital expenditures. Digicel cannot assure you that unforeseen technological developments will not render Digicel’s services unpopular with customers or obsolete. For example, for many years a majority of Digicel’s smartphone subscribers had Blackberry handsets, but the general decline in Blackberry popularity led to customers switching to alternative devices such as Android smartphones. In addition, to the extent Digicel’s equipment or systems become obsolete, it may be required to recognize an impairment charge to such assets, which may have a material adverse effect on Digicel’s business and results of operations.

If Digicel cannot successfully develop and manage its networks, Digicel will be unable to expand its subscriber base and could lose market share and revenue.

Digicel’s ability to increase its subscriber base depends upon the success of the expansion and management of Digicel’s networks. The build-out of Digicel’s networks is subject to risks and uncertainties that could delay the introduction of service in some areas and increase the cost of network construction. Digicel leases most of the sites on which its cellular communications towers are located. Any failure or delay in securing the renewal of these leases on favorable terms could have a material adverse effect on Digicel’s results of operations. To the extent Digicel fails to expand its network on a timely basis, Digicel could experience difficulty in maintaining or expanding its subscriber base as its network or spectrum position may not be able to adequately support its existing or new subscribers. In addition, Digicel’s ability to manage its business successfully is dependent upon its ability to implement sufficient operational resources and infrastructure. The failure or breakdown of key components of Digicel’s infrastructure in the future, including its billing systems, could have a material negative effect on Digicel’s profits and results of operations.

Expansion may cause Digicel difficulty in obtaining adequate managerial and operational resources and restrict its ability to successfully expand its operations.

Digicel’s continued expansion has placed, and Digicel expects will continue to place, a significant strain on the Company’s management and Digicel’s operations and financial resources. In addition, as Digicel seeks to diversify its product portfolio to include a variety of Business Solutions, Cable TV and content services, it will need to expand its managerial and operational resources. Management of growth and diversification will require, among other things:

 

    stringent control of network build-out and other costs;

 

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    continued development of financial and management controls and information technology systems;

 

    expansion of internal controls;

 

    hiring and training of new and existing personnel; and

 

    coordination among Digicel’s logistical, technical, accounting and finance personnel.

The expansion of Digicel’s product portfolio could prove costly, time-consuming and divert the Company’s management’s attention from other day-to-day business matters.

Digicel’s success will also depend, in part, on its ability to continue to attract, retain and motivate qualified personnel. Competition for personnel in Digicel’s markets is intense due to the small number of qualified individuals. Digicel’s failure to successfully manage its growth and personnel needs could have a material negative effect on its business and results of operations.

Some of the locations of the operations of Digicel’s subsidiaries expose Digicel to the risk of significant disruptions of service should a natural catastrophe occur at or in the vicinity of such locations and the effects of extreme weather conditions, including as a result of global climate change, could negatively affect Digicel’s business.

Some of Digicel’s operating subsidiaries’ operations, such as billing systems, dealer management and commission handling, data warehousing, short messaging services, roaming reconciliation and network operating centers, are centralized in central hubs. Such services are provided by Digicel’s operations at the central hubs to the operating subsidiaries under service agreements negotiated on an arm’s-length basis. Although some of these operations have already been duplicated locally in each subsidiary and other operations will likely be duplicated for contingency purposes, a natural disaster affecting Digicel’s central hubs, or a deterioration in the financial viability of Digicel’s operations at such locations, could cause interruptions in, or termination of, services provided by Digicel’s operations to the operating subsidiaries. It would be time-consuming and difficult to find a replacement service provider for such operations and any such events would have a material adverse impact on Digicel’s and its subsidiaries’ business and operations.

Additionally, extreme weather conditions, such as the recent drought in Papua New Guinea, could negatively affect Digicel’s business. In particular, global climate change, may increase the frequency and severity of adverse weather conditions, such as hurricanes, floods and other climatic events, may interrupt or curtail Digicel’s operations, or Digicel’s customers’ operations, cause supply disruptions, result in a loss of revenue and damage to Digicel’s equipment and facilities and negatively impact the economic health of the regions in which Digicel operates.

Any expansion into new markets or new lines of business might not be successful.

As part of Digicel’s ongoing business strategy, we regularly consider expansion into new geographic markets and into new lines of business through the acquisition of third parties or organic growth. For example, Digicel has recently completed several acquisitions as a part of its evolution into an integrated provider of Mobile, Business Solutions, Cable TV & Broadband and other related products and services. There are substantial risks associated with such efforts, including risks that (i) revenue from such activities might not be sufficient to offset the development, regulatory and other implementation costs, (ii) competing products and services and shifting market preferences might affect the profitability of such activities and (iii) Digicel’s internal controls might be inadequate to manage the risks associated with new activities. Furthermore, it is possible that Digicel’s unfamiliarity with new markets or lines of business might adversely affect the success of such actions. If any such expansions into new geographic or product markets are not successful, there could be a material negative effect on Digicel’s business and results of operations.

 

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Digicel’s current operations and its expansion plans have significant capital expenditure requirements and if Digicel is unable to acquire such additional capital in a timely manner or at terms commercially acceptable to Digicel, its business may be adversely affected.

Digicel expects that the continuing expansion and development of its business will continue to require significant capital, which Digicel may be unable to obtain on acceptable terms, or at all, to fund Digicel’s capital expenditures and operating expenses, including working capital needs. Digicel incurred capital expenditures in cash of $648.7 million in the year ended March 31, 2015 and $195.8 million for the three months ended June 30, 2015. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.

Digicel’s capital requirements may vary materially from those currently planned if, for example, Digicel’s revenue does not reach expected levels or Digicel has to incur unforeseen capital expenditures and make investments to maintain Digicel’s competitive position. If this is the case, Digicel may require additional financing sooner than anticipated, or Digicel may have to delay or abandon some or all of Digicel’s development and expansion plans or otherwise forego market opportunities. Digicel may not be able to obtain future equity or debt financing on favorable terms, if at all. Future borrowing instruments such as credit facilities and lease agreements are likely to contain restrictive covenants and may require Digicel to pledge assets as security for borrowings under those facilities or agreements. In addition, Digicel and its subsidiaries are all party to debt instruments that impose significant limitations on Digicel’s and their ability to raise additional debt financing.

Digicel’s affiliate, DHCAL, may require additional funding, and if it is unable to acquire such additional capital in a timely manner or at commercially acceptable terms, its business may be adversely affected.

As of June 30, 2015, Digicel was owed $329.6 million by DHCAL and its subsidiaries as a result of loans provided to them in connection with its operations in Panama and, prior to its disposal, its operations in Honduras. We have recognized impairment charges totaling $281.0 million and recorded $25.6 million as our share of losses against the carrying value of the loans. As of June 30, 2015, the carrying value of our investment in DHCAL (including our loans) for accounting purposes was $16.2 million. Digicel may provide additional funding to DHCAL to fund certain of its debt service obligations or capital expenditure requirements. In February 2014, DGL provided a guarantee of Digicel Panama’s debt service obligations to its lenders, See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.

In February 2014, DGL provided a guarantee of Digicel Panama’s debt service obligations to its lenders in exchange for their consent to remove quarterly financial covenants in the financing arrangements. At June 30, 2015, $63.9 million was outstanding under the Panama Facility (as defined below). Digicel’s current dispute with the minority shareholder in the Panama business could further complicate the ability for DHCAL to receive funds from ourselves or any other source. See “—Although Digicel currently exercises management control over all its subsidiaries, it owns less than 100% in certain companies and this ownership structure carries certain risks. Disagreements or unfavorable terms in the shareholders agreements governing such subsidiaries could adversely affect Digicel’s operations or affect its ability to cause its subsidiaries to pay dividends to Digicel.” DHCAL’s capital requirements may vary materially from those currently planned if, for example, its revenue does not reach expected levels or it has to incur unforeseen capital expenditures and make investments to maintain its competitive position.

DHCAL may not be able to obtain future equity or debt financing on favorable terms, if at all. Future borrowing instruments such as credit facilities and lease agreements are likely to contain restrictive covenants and may require it to pledge assets as security for borrowings under those facilities or agreements. DHCAL’s inability to obtain additional capital on satisfactory terms may delay or abandon some or all of its development and expansion plans or otherwise forego market opportunities. DHCAL’s subsidiaries are party to debt instruments that impose significant limitations on their ability to raise additional debt financing.

 

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Digicel’s ability to provide further capital for DHCAL is and will be substantially limited by the terms of Digicel’s indebtedness. Digicel’s equity interest in DHCAL is held through an “unrestricted subsidiary,” and any investments in it by Digicel is and will be subject to a limitation on restricted payments included in the indentures governing Digicel’s senior notes.

Digicel’s operations are subject to various operating risks including breakdowns of equipment, interruption of supplies and services and natural disasters, and resulting losses may cause a material adverse impact on Digicel’s business and operations.

Digicel uses a wireless network in each of Digicel’s markets and a microwave backbone system. In addition, Digicel uses cable and fiber networks in certain of its markets. The continued operation of Digicel’s networks involves many risks, including the breakdown of transmission equipment, the failure of billing and other core network software systems, the interruption of required power supplies and the effect of hurricanes and other natural disasters common in the Caribbean and South Pacific regions. For example, in 2004, Hurricane Ivan damaged equipment, blocked roads and disrupted power, and Digicel’s services throughout Jamaica, Grenada and the Cayman Islands were interrupted as a result. In addition, an earthquake in January 2010 caused damage to Digicel’s buildings and equipment in Haiti, and Digicel’s services throughout Haiti were interrupted as a result. Furthermore, in March 2015, a tropical cyclone caused widespread damage in Vanuatu, including damage to certain of Digicel’s assets. Although facilities in each of Digicel’s markets contain certain redundancies and back-up mechanisms, there can be no assurance that any such breakdown or failures would not prevent the affected facility from performing. Any insurance maintained to protect against certain of these operating risks may not be adequate to cover lost revenue or increased expenses. Breakdown or failure of equipment and/or systems in any of Digicel’s markets may significantly reduce its revenue or increase its costs and adversely impact its business and results of operations.

Potential acquisitions or other strategic investments may require Digicel to incur substantial additional debt and integrate new technologies, operations and services and Digicel may not be able to execute its acquisition strategy successfully.

Digicel regularly considers opportunities to expand its business in the Caribbean, Central American, South Pacific and other regions through acquisition of licenses, mergers and acquisitions, joint ventures or other forms of strategic investment in other wireless operators. Any strategic investment Digicel pursues may cause it to incur substantial additional indebtedness to finance the investment or, in the case of an acquisition, to assume the indebtedness of the entities that are acquired.

In addition, Digicel may not be able to obtain the requisite regulatory approvals to consummate such transactions. For example, Digicel had agreed in recent years to sell its El Salvador business to America Movil but in this case the required regulatory approval was not obtained and the sale of the El Salvador business did not proceed. Furthermore, obtaining governmental approvals may cause delays in the consummation of a sale or impose additional costs associated with such transactions, and Digicel would be subject to business uncertainties while the sale is pending. By way of further example, the fair trading commission in Jamaica challenged Digicel’s acquisition of the Claro Jamaica business from America Movil in 2012, claiming that the acquisition would lessen competition in the market. The court of first instance ruled against Digicel on certain preliminary points in May 2012, which ruling was appealed. The Court of Appeal of Jamaica reversed the decision made at first instance and ruled in favor of Digicel. However, the fair trading commission has filed a limited appeal on certain points of law with the Privy Council. Digicel believes that the substantive challenge to the acquisition on the part of the fair trading commission has effectively concluded, as the points raised by the fair trading commission on appeal do not appear to challenge the acquisition.

Furthermore, Digicel may encounter difficulties in integrating acquired operations, including the financial information of the acquired operations, with Digicel’s own operations, including as a result of different technologies, services or service offerings. These actions could prove costly or time-consuming or divert the Company’s management’s attention from other business matters.

 

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Digicel’s business strategy includes pursuing new license opportunities in markets in which it does not operate and Digicel expects that other wireless telecommunications operators, including some of its existing competitors, have or will obtain licenses in some of the markets where Digicel is seeking licenses. The competition to obtain or renew licenses is increasingly intense. As such, Digicel may have to pay substantial license fees and/or spectrum allocation fees in certain markets, as well as meet specified network build-out requirements. Digicel cannot assure you that it will be successful in obtaining any further wireless telecommunications licenses. If Digicel obtains more licenses, it may need to seek future funding through additional borrowings or equity offerings, and Digicel cannot assure you that such funding will be obtained on satisfactory terms or at all. Digicel would likely face significant competition from incumbents and may not be successful in these launches.

Digicel relies on its key management personnel, and its inability to retain its current personnel or attract other talented professionals may have an adverse impact on its business.

Digicel’s success to date has been influenced by the abilities and wireless telecommunications operating experience of Digicel’s senior management team, including the Company’s chairman, Digicel’s chief executive officer and others. If Digicel loses the services of one or more of the Company’s executive officers or key employees or if one or more of them decides to join a competitor, Digicel may find it difficult to find replacements with similar knowledge and experience, especially in relation to Digicel’s business. As a result, Digicel’s business, results of operations and financial condition could be adversely affected. Digicel’s future success will depend on Digicel’s continued ability to attract, retain and motivate skilled employees and other senior management personnel. If Digicel is unable to attract skilled professionals, fails to integrate them into its organization or fails to retain them after it has invested resources in their training, Digicel’s ability to compete and its operations will be affected. In addition, some members of Digicel’s senior management team are not parties to non-compete agreements covering the entire Caribbean, Central American and South Pacific markets. Therefore, a loss of key management personnel may have a material adverse effect on Digicel.

Digicel is party to a number of arrangements with affiliates, including its investment in DHCAL, and some of them may not be on an arm’s-length basis.

Digicel is party to a number of arrangements with affiliates controlled by Mr. O’Brien, the Company’s founder and Chairman of the Company’s Board of Directors, including relationships with DHCAL. These arrangements are described under “Certain Relationships and Related Party Transactions.” For example, on March 20, 2009, April 1, 2009 and October 1, 2009, Digicel made investments in DHCAL, including through a purchase of shares of DHCAL held by Mr. O’Brien. After giving effect to the investment in DHCAL, Mr. O’Brien still directly holds a controlling interest in DHCAL. Digicel expects to make additional investments, in the form of debt or equity, in DHCAL in the future. Mr. O’Brien may have an interest in pursuing transactions that, in his judgment, enhance the value of his equity investment in DHCAL, even though those transactions may involve risk.

Digicel may enter into additional related party transactions in the future. Digicel cannot assure you that the consideration in these transactions would not be different and more favorable to Digicel were they conducted with an unaffiliated third-party.

 

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Although Digicel currently exercises management control over all its subsidiaries, it owns less than 100% in certain companies and this ownership structure carries certain risks. Disagreements or unfavorable terms in the shareholders agreements governing such subsidiaries could adversely affect Digicel’s operations or affect its ability to cause its subsidiaries to pay dividends to Digicel.

In 13 of Digicel’s markets, operations are partly owned by local investors holding minority positions ranging from 1% to 49%. In addition, DHCAL does not own all of its Panama operations. Digicel may also make new acquisitions or investments whereby it will hold less than 100% in these companies. Owning such majority interests carries certain risks, including:

 

    conflicts between the policies or objectives adopted by Digicel’s partners and those adopted by Digicel or non-compliance by such partner with the policies or objectives adopted by Digicel, particularly regarding insurance coverage and sanctions compliance;

 

    reputational risks from associating with Digicel’s partners;

 

    disagreement with Digicel’s partners over the performance of their obligations;

 

    disputes as to the scope of each party’s responsibilities;

 

    financial difficulties encountered by Digicel’s partners affecting their ability to perform their obligations;

 

    financial or other obligations of joint ventures, which may be (partially or wholly) guaranteed by Digicel in certain locations;

 

    approval requirements imposed by shareholder agreements with certain investors may limit Digicel’s flexibility and ability to implement strategies and tactics that Digicel believes are in its best interests;

 

    Digicel’s ability to withdraw funds, including dividends, from those subsidiaries depends on receiving the consent of the other investors; and

 

    the requirement to purchase the equity interest of partners.

These and other risks may result in a deadlock situation and an inability to distribute profits or make further necessary investments.

Digicel’s forecasts and plans for these operations assume that Digicel’s local partners will fulfill their obligations to contribute capital. If any of Digicel’s local partners fail to observe their commitments, it is possible that the affected subsidiary would not be able to operate in accordance with its business plans or that Digicel would have to increase the level of Digicel’s investment to give effect to these plans.

While the precise terms of the arrangements vary, Digicel’s operations may be affected if disagreements develop with its local partners. Any disagreements with the minority shareholders in Digicel’s subsidiaries may have an adverse effect on its business and results of operations. Currently, Digicel has a dispute with the 30% minority shareholder in the Panama business owned by DHCAL. The dispute relates to a capital call made by the Board of Directors of the Digicel Panama business. The minority shareholder has filed certain counterclaims alleging breach of contract and other claims against Digicel. The dispute has gone to arbitration and while the hearing has completed, it is likely to be the second quarter of fiscal 2016 before the outcome of this arbitration is known. Digicel has continued to fund the Panama operation through DHCAL without diluting the minority shareholder by means of a shareholder loan pending the results of this arbitration. However, there are no assurances that Digicel will continue to do so. In addition, it is possible that the minority shareholder will take further legal action against Digicel with claims in relation to the Panama business or that further legal action will be required on the part of Digicel to resolve disputes with the minority shareholder. See “—Digicel’s current operations and its expansion plans have significant capital expenditure requirements and if Digicel is unable to acquire such additional capital in a timely manner or at terms commercially acceptable to Digicel, its business may be adversely affected”.

 

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In addition, in some cases, Digicel may receive less information on the business activities of these companies than it would on one of its wholly-owned subsidiaries and it will typically not have full control over the companies’ conduct of business as certain topics are reserved matters for which decision making requires unanimity of the joint venture participants. Rights of minority shareholders may negatively affect the Company’s ability to control certain subsidiaries. If such conflicts or problems arise, they could have a material adverse effect on Digicel’s business, financial condition and results of operations.

Digicel operates in some markets that are considered politically and economically unstable, which could negatively affect its operations.

Digicel currently has interests in wireless telecommunications operations in 24 markets in the Caribbean region, six in the South Pacific and two in Central America. Digicel is subject to government regulation in each market. The governments in these markets differ widely with respect to structure, constitution and stability and some of these countries lack mature legal and regulatory systems. Recent political, security and economic changes have resulted in political and regulatory uncertainty in certain countries in which Digicel operates. Some of these countries have experienced political, security and economic instability in the recent past and may experience instability in the future. Furthermore, certain countries in which Digicel operates, such as Haiti, or in which Digicel may operate in the future, face significant challenges relating to lack, or poor condition, of physical infrastructure, including transportation, electricity generation and transmission.

For example:

 

    Jamaica has very high public debt to GDP ratios with public debt hovering around 140% of GDP; had its credit ratings downgraded by Standard & Poor’s and Moody’s and had difficulties servicing its public debt at the end of 2009. In February 2010, the International Monetary Fund (“IMF”), approved a $1.3 billion loan to Jamaica, and Jamaica conducted an exchange offer of its debt in order to lower its interest payments. On October 31, 2011, Standard & Poor’s lowered its outlook of Jamaica from stable to negative. Jamaica’s debt servicing costs remain high, which hinder the government’s ability to spend funds on infrastructure and other programs, which in turn could have a material adverse effect on the economic activity of the country and Digicel’s business. On February 12, 2013, Jamaica launched a second debt exchange offer in order to further lower its interest payments. As a result, Standard & Poor’s lowered its credit rating for Jamaica to selective default and Fitch cut Jamaica’s sovereign credit rating to C. While Standard & Poor’s raised Jamaica’s sovereign credit rating to B- in September 2013 and to B in June 2015, there is no assurance that downgrades will not occur again in the future.

 

    In addition, inflation in Jamaica had increased and the exchange rate has continued its gradual depreciation relative to the U.S. dollar. By March 31, 2015 the Jamaican dollar had depreciated by 9.1% relative to the U.S. dollar in a twelve month period, which affected Digicel’s revenue for the year ended March 31, 2015.

 

    Haiti has experienced significant instability, which may continue. Conditions in Haiti were exacerbated by the earthquake in January 2010, which caused extensive damage in the country’s capital, Port-au-Prince, and surrounding areas and, more recently, cholera and hurricanes. Haiti’s long-term recovery is dependent on foreign aid, which may not be sufficient to address the country’s needs, and this could adversely affect Digicel’s business.

 

    In 2006, the military of Fiji took over the government and the country did not hold democratic elections until September 17, 2014. See “Business—Digicel’s Operations”.

 

    In Papua New Guinea, successful national elections were held in July 2012 (notwithstanding some local violence) and previous political rivals have now formed a coalition government, while some former government ministers are now in opposition. However, the political environment in Papua New Guinea remains fluid and may be subject to rapid change. Additionally, Papua New Guinea’s recent economic performance has been impacted by a drought that has caused reduced agricultural yields and reduced mining operations as well as by lower oil and gas prices and therefore has affected the economy and our business.

 

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    In 2010, Myanmar held an election and installed a civilian government after a long period of civil war and military dictatorship. Digicel does not know whether Myanmar will experience further instability in the future and such instability could negatively impact Digicel’s plans to develop, construct and lease telecommunications towers in Myanmar.

 

    In 2015, the security situation in El Salvador deteriorated as gang members disrupted the public transport system by ordering bus drivers to halt services and attacking and sometimes murdering those that failed to comply. The government reacted through military intervention and undisclosed negotiations, and after four days public transport was restored. Digicel’s business could be adversely affected if the security situation in El Salvador deteriorates further.

These challenges could interrupt Digicel’s operations and could have a material adverse impact on Digicel’s ability to maintain and grow its business.

Potential inflation in local economies may affect some customers’ ability to pay for Digicel’s subsidiaries’ services, and it may also adversely affect the stability of the communications market in those areas.

Digicel’s operations are dependent upon the economies of the markets in which Digicel has interests. These markets are in countries with economies in various stages of development or structural reform, some of which are subject to rapid fluctuations in terms of consumer prices, employment levels, GDP and interest and foreign exchange rates. Digicel may be subject to such fluctuation in the local economies and to the effect of such fluctuations on the ability of customers to pay for Digicel’s subsidiaries’ services. In addition, these fluctuations may affect the ability of the market to support Digicel’s existing wireless telephone interests or any growth in wireless telephone operations. It is also possible that a period of significant inflation in any of Digicel’s markets could adversely affect Digicel’s costs and financial condition.

Digicel may be affected by fluctuations in interest rates, which may have an adverse impact on its business and financial condition.

Digicel’s existing debt consists, in part, of U.S. dollar-denominated variable rate instruments based on a margin over a LIBOR-based benchmark, euro-denominated variable rate instruments based on a margin over a Euro LIBOR-based benchmark, Jamaican dollar-denominated debt with interest based on the Jamaican Treasury Bill rate, Trinidad and Tobago dollar-denominated debt with interest based on the discount rate for 90 day T-bills as quoted by the Central Bank of Trinidad and Tobago, Papua New Guinea kina-denominated debt with interest rates based on a benchmark lending rate published in Papua New Guinea, Samoan Tala-denominated debt with interest rates based on a benchmark lending rate published in Samoa and Fijian dollar-denominated debt with interest rates based on a benchmark lending rate published in Fiji. Changes in interest rates are driven by market conditions, the interest rate policies of various governments and central banks, and other circumstances beyond Digicel’s control. Any future increase in any of the LIBOR, Euro LIBOR or the bond funding rate will increase Digicel’s cost of debt financing, resulting in an increased use of cash flow from operating activities to service Digicel’s indebtedness. Such an increase could adversely affect Digicel’s results of operations and financial condition.

Some of Digicel’s customers depend on remittances from family members living overseas. Laws, regulations or events that limit such remittances may adversely affect its operations.

Many of the countries in which Digicel has operations depend on remittances from emigrants as a source of foreign currency. Many of Digicel’s customers depend on such remittances as either a primary or secondary source of income. Any circumstance, law, regulation or event that restricts, reduces or prevents these remittances may have an adverse effect on Digicel’s operations.

 

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Digicel collects and processes sensitive customer data.

Digicel increasingly collects, stores and uses customer data that may be protected by data protection laws in various jurisdictions in which Digicel operates, specifically through its mobile applications, particularly for mobile financial services and Business Solutions. Regulatory authorities in some of the markets in which Digicel operates have the right to audit Digicel and impose fines if they find Digicel has not complied with applicable laws and adequately protected customer data. Although Digicel takes precautions to protect data in accordance with applicable privacy requirements, it may fail to do so and certain data may be leaked or otherwise used inappropriately. Violation of data protection laws may result in fines, damage to Digicel’s reputation and customer churn and could have an adverse effect on Digicel’s business, financial condition and results of operations.

Most of the countries in which Digicel operates do not have universal service obligations; however, if such obligations were introduced, the profitability of Digicel’s operations could be negatively impacted.

In certain of the countries in which Digicel operates, the access to telecommunications services may differ widely between urban and rural areas. When such services are available in rural areas, they are usually at significantly higher cost to providers than in urban areas, due to lower population density and access challenges due to lack of basic infrastructure, in particular roads and electricity. The purpose of universal service obligations are to provide access to persons in non-urban and isolated areas to telecommunications services by infrastructure build-out through subsidies at fair, reasonable and affordable rates. Currently Digicel is subject to such universal service obligations in some of its markets, which involves the imposition of levies on telecommunications operators to contribute to the development of infrastructure in such areas. It is possible that further markets in which Digicel operates will introduce universal service obligations in the future, which could have a negative impact on Digicel’s profitability.

In August 2015, the Government of Trinidad and Tobago approved Universal Service Regulations, which had been pending since 2013. The fees are calculated at 0.5% of gross revenues for domestic telecommunications services and at 1% for international telecommunications services. The Universal Service Obligation (“USO”) levy in Trinidad and Tobago is expected to come into effect on October 1, 2015.

Digicel’s brands are subject to reputational risks.

The brands under which Digicel sells its products and services, including the “Digicel” brand, are well-recognized brands across the geographic markets in which it operates. Digicel’s brands represent a material and valuable asset to Digicel. Although Digicel tries to manage its brands, it cannot guarantee that its brands will not be damaged by circumstances that are outside its control or by third parties such as hackers, sponsorees, or interfaces with its clients, such as subcontractors’ employees or sales forces, with a resulting negative impact on Digicel’s activities. A failure on Digicel’s part to protect its image, reputation and the brands under which it markets its products and services may have a material adverse effect on Digicel’s business and results of operations.

Digicel may incur significant costs from wireless fraud, which could negatively affect Digicel’s operating results.

Digicel may incur costs and revenue losses associated with the unauthorized use of Digicel’s networks, including administrative and capital costs associated with the unpaid use of Digicel’s networks as well as with detecting, monitoring and reducing the incidences of fraud. Fraud also impacts interconnect costs, capacity costs, administrative costs and payments to other carriers for unbillable fraudulent roaming charges.

 

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The current concerns about the actual or perceived health risks relating to electromagnetic and radio frequency emissions, as well as the attendant publicity or possible resultant litigation, may have a negative effect on Digicel’s financial condition or the results of its operations.

Media and other reports have suggested that electromagnetic and radio frequency emissions from mobile telephone handsets and base stations may cause health problems, including cancer. There is also some concern that these emissions may interfere with the operation of certain electronic equipment, including automobile braking and steering systems. The actual or perceived risks relating to mobile communications devices and base stations, or press reports about these risks, could adversely affect Digicel, including by reducing Digicel’s subscriber growth rate, subscriber base or average use per subscriber. Actual or perceived risks of mobile handsets or base stations could make it difficult to find attractive sites for mobile base stations or cell towers and reduce Digicel’s growth rates, customer base and average usage per customer.

Risks Relating to Legislative and Regulatory Matters

The telecommunications operations market is heavily regulated and changes in regulation could adversely affect Digicel.

The licensing, construction, ownership and operation of telecommunications networks and the grant, maintenance and renewal of telecommunications licenses, as well as radio frequency allocations and interconnection arrangements and other attendant matters relating to Digicel’s operations are regulated by different governmental authorities in each of the markets that Digicel serves. In addition, such matters and certain other aspects of telecommunications operations, including, for instance, rates charged to customers, carriage of international traffic, international settlement rates, interconnection charges or quality of service provision, may also be subject to regulation in each of the markets that Digicel serves. Changes in the regulation of Digicel’s activities, such as increased or decreased regulation affecting retail or wholesale pricing, the terms of interconnect arrangements with other fixed-line telephone or mobile operators, or requirements for increased capital investments, could have a material adverse effect upon Digicel’s business and results of operations.

Mobile termination rates and other network interconnect rates are generally regulated. In many of the markets in which Digicel operates such rates are regulated and regulators are following the global trend towards decreasing rates with a move towards the provision of interconnection services on a cost of provision basis using long run incremental costing or other similar forms of cost-based accounting.

An example would be the significant recent decline in mobile termination rates applicable to Digicel’s operations in the French West Indies. On November 2, 2010, the French regulator, the Autorité de Régulation des Communications Électroniques et des Postes (“ARCEP”), implemented mandatory phased reductions on mobile termination rates of 38% on January 1, 2011, 38% on January 1, 2012, 60% on January 1, 2013, 15% on November 1, 2013 and a further 22% on January 1, 2015. It is possible that additional reductions in mobile termination rates will be made by ARCEP. By way of other examples, in Jamaica, the regulator reduced the mobile termination rates by 78% in July 2013 to J$1.1. In El Salvador, in August 2011, the regulator introduced a 12.5% reduction in mobile termination rates and also introduced further reductions of 11.9%, 14.8% and 21.6% in 2012, 2013 and 2014, respectively. In Anguilla, the regulator introduced decreased interconnection rates in October 2012 that has, over a phased period, decreased the mobile termination rates by approximately 66%. In Barbados, the fair trading commission published a decision in March 2015 that went effective on August 1, 2015 and that is expected to reduce mobile termination rates by approximately 80% over a two-year period. For the three months ended June 30, 2015, mobile termination revenue in Barbados represented approximately 9.5% of Digicel Barbados’ revenue and 0.2% of Digicel’s consolidated revenue.

Regulators in Trinidad and Tobago and in other markets are presently involved in or have announced consultation processes which could ultimately involve reductions in mobile termination rates; such reductions are following the global trend of reduced mobile termination rates and other interconnection charges with a move towards the cost-based provision of interconnection services. These processes and any other rate changes or changes to key financial metrics brought about through the imposition of regulatory measures could adversely affect Digicel.

 

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Digicel also typically requires other governmental permits, including permits for the construction and operation of cell sites in each of the markets that Digicel serves. Obtaining such permits may be difficult, which could delay launches of, or improvements to, Digicel’s networks. In addition, some of the smaller markets in which Digicel operates, including Anguilla, Antigua and Barbuda, the Cayman Islands, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines, require foreign-controlled companies to obtain permission from governmental officials to lease or own real property. Digicel has not obtained any such permissions. Digicel could be required to make payments to obtain such permissions, or be required to find new leases. Digicel currently does not expect any such costs to be material.

Regulation of the Internet is evolving, and unfavorable changes or failures by Digicel to comply with these laws and regulations could substantially harm Digicel’s business and results of operations.

In certain of Digicel’s markets, the laws and regulations governing use of the Internet are evolving. Any such existing and future laws or regulations may impede the growth of the Internet or other online services in such markets or otherwise adversely affect Digicel’s operations. These laws and regulations could relate to user privacy, data protection, pricing, quality of service, content, copyright, distribution, electronic contracts and other communications, consumer protection, universal service obligations and Internet access. In addition, it may not be clear how existing laws governing matters such as intellectual property ownership and personal privacy apply to the Internet in Digicel’s markets. Any changes in the applicable law and regulations relating to these matters may negatively impact Digicel’s business.

Digicel could be subject to unexpected political, economic or legal developments that impact telecommunications regulations, particularly in countries where the regulatory regimes are less well-established.

The regulatory regimes in most of the countries in which Digicel operates are less well-established than in developed countries where meaningful regulation in the telecommunication industry has existed for a longer time. As a result, Digicel’s operations could be subject to unexpected political, economic or legal developments that impact telecommunications regulation, which could adversely impact Digicel’s business. There can be no assurance that the laws or administrative practices relating to taxation (including the current position as to withholding taxes on interest or dividends from the subsidiaries and tax concessions in certain operations), foreign exchange, export controls or otherwise in these or other jurisdictions will not change. The number of regulatory measures that Digicel’s operations are subject to may also increase or become more onerous in these countries as these countries reform their telecommunications laws. Some countries such as Papua New Guinea, Barbados, Guyana, Tonga, Suriname, St. Lucia, St. Vincent and the Grenadines, Grenada, Dominica, Antigua and Barbuda have announced plans to reform, or are in the process of reforming, their telecommunications laws. Any changes in the applicable law and regulatory framework relating to Digicel’s activities may negatively impact Digicel’s business.

For example, in Jamaica, the regulator designated Digicel’s Jamaica operation and its other mobile competitor as dominant public voice carriers. As a result, Digicel became subject to more regulation in Jamaica, in particular in relation to interconnection rates. For example, the Jamaican regulator, the Office of Utilities Regulation (“OUR”), imposed regulated prices for mobile termination initially through the imposition of interim rates in May 2012 and then by issuing its final determination on new mobile termination rates at the end of May 2013 following its cost model consultation process. As a result, mobile termination rates are now set at J$1.1 (approximately one U.S. cent). The actions taken by the OUR were facilitated by the introduction of a new telecommunications policy which resulted in a comprehensive update to the applicable Telecommunications legislation. While the new government had previously indicated that new legislation would have to go through proper consultation and debate before being considered for a vote, in May 2012, the Jamaican parliament approved a new bill to amend the Telecommunication Act without any consultation with the industry. This bill was passed by Parliament as “emergency legislation,” which legislation significantly increased the powers of the OUR, including the ability to set interim termination rates and interim retail price caps; award damages to third

 

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parties; conduct search and seizure of an operator’s premises and property without the need for a court order; request any information that the OUR deems to be of interest; disclose information that is currently considered to be confidential; and set termination rates based on long-run incremental costs. Digicel believes that some of these amendments and the manner in which they were enacted are unconstitutional. These extended powers granted to the OUR by the passing of this emergency legislation in 2012 may have a material adverse impact on Digicel’s retail and wholesale revenue and generally Digicel’s operations in Jamaica. In addition, the government of Jamaica introduced two new taxes on the telecommunications sector in May 2012 and in February 2013 made these subject to a general consumption tax. See “—Digicel may be subject to further taxes or fees imposed by various governmental entities”.

In Papua New Guinea from late 2007 to late 2009, telecommunications legislation was under review by the government. This legislative review included at one stage a proposal to reformulate Digicel’s license that would have resulted in it effectively operating as a mobile virtual network operator, relying on a telecommunications network operated solely by the incumbent telecommunications operator in Papua New Guinea. Following extensive discussions between DPL, and the government at the time, this proposal was removed from the draft legislation. The new telecommunications legislation came into effect in October 2010 and did not contain this proposal. However, the telecommunications legislation remains subject to review from time to time. The regulator is currently conducting a consultation process in Papua New Guinea relating to proposed amendments to the existing regulatory framework. Digicel is engaged in this ongoing consultation process.

The telecommunications regulator in Papua New Guinea has also announced that it would mandate SIM registration in mid- to late 2014 although this process has been delayed. SIM registration would require both existing and new prepaid subscribers to provide personal identification details as a prerequisite to receiving service. It is likely that there will be a requirement to disconnect current subscribers who fail to register themselves after a grace period that is yet to be determined. As the vast majority of Papua New Guineans do not hold formal identification documentation and live in rural and remote communities, the SIM registration requirement could have the practical effect of limiting the potential number of mobile subscribers in Papua New Guinea until such requirements can be addressed, and this could potentially negatively impact Digicel’s subscriber base and revenue in Papua New Guinea.

In addition, Digicel’s competitors are often state-owned or have ties with the government. As such, they may receive financial support from the state, and be subject to less onerous regulations than Digicel is.

In some of Digicel’s markets, Digicel may not be granted the licenses it applies for in order to provide its products, such as Cable TV & Broadband. Digicel’s licenses and frequency allocations are subject to ongoing review which may result in modification, early termination, revocation or non-renewal.

Digicel may not be granted the licenses it applies for in order to provide the products it may wish to offer. In addition, the continued existence and terms of wireless telecommunications licenses and frequency allocations are subject to ongoing review and, in some cases, to modification or early termination or revocation. While Digicel would not expect to be required to cease operations in any market at the end of the term of Digicel’s business arrangement, license or permit, Digicel cannot assure you that business arrangements or licenses will be renewed on equivalent or satisfactory economic terms, or at all. For example, in Aruba, Digicel’s license was renewed in January 2013; however, the renewal is subject to onerous conditions such as requirements to install equipment in Aruba that is currently operated out of a central location outside of Aruba, thus increasing Digicel’s capital expenditure. Digicel has challenged this imposition through the Courts in Aruba and was successful with this challenge before the Court of first instance in Aruba. The regulator has appealed this decision and the matter is ongoing. Digicel’s licenses expire at various times between 2015 and 2029. Upon termination or revocation, the license may revert to the government or local telecommunications agency without, in some cases any, or adequate, compensation to Digicel.

In another example, the government of Fiji issued a decree on spectrum allocation in 2009 giving the Minister for Communications wide ranging discretion to reallocate spectrum or to impose additional license fees

 

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across telecommunications and broadcast companies operating in Fiji without any right of appeal or legal redress and without provision for the payment of compensation. Although a new spectrum management regime was introduced in 2013, the Minister’s discretion to reallocate spectrum as granted in 2009 has not been formally repealed. In other markets, Digicel may be subject to limitations on spectrum allocation, which could limit Digicel’s ability to provide services such as Long-term Evolution (“LTE”) or to address additional requirements for capacity to serve existing customers.

Certain disputes with regulators or with competitors could adversely affect Digicel if they are not resolved in Digicel’s favor.

Digicel is party to certain disputes with regulators and competitors from time to time that could have a material adverse effect on its business and results of operations.

Operators that are determined to be “dominant” may be subject to additional regulation, and in particular, additional regulation on interconnection charges, retail rates or wholesale rates. For example, the Telecommunications Appeal Tribunal, set up under Section 61 of the Jamaica Telecommunications Act 2004 to hear appeals by persons aggrieved by any decision of the OUR, confirmed on May 31, 2010 an earlier OUR determination that all mobile operators in Jamaica are declared dominant. As a result, mobile operators in Jamaica, including Digicel, are subject to more regulation, including an obligation to issue a Reference Interconnect Offer that includes rates which need to be approved by the regulator. The OUR launched its cost calculation consultation in 2012 and issued its final determination on May 31, 2013 in which it established that Jamaican mobile termination rates shall be set at J$1.1 (approximately one U.S. cent) with effect from July 1, 2013. In the year ended March 31, 2015, domestic mobile termination revenue in Jamaica represented approximately 1.6% of Digicel Jamaica’s total revenue and 0.2% of Digicel’s consolidated revenue. For the three months ended June 30, 2015, domestic mobile termination revenue in Jamaica represented approximately 1.9% of Digicel Jamaica’s total revenue and 0.3% of Digicel’s consolidated revenue.

Digicel uses the Jamaican Mobile Country Code and Mobile Network Code (a technical routing number not dialed by customers, also known as the Home Network Identity (“HNI”) Code) in many of the markets in which Digicel operates, a practice which provides significant operating benefits for Digicel because it allows for the faster deployment of roaming services. However, this practice is being disputed by some regulatory officials and some of Digicel’s competitors. In September 2008, the International Telecommunications Union (“ITU”), approved annex E to Recommendation E.212, which states that in the event that both regulators agree that an operator can use an HNI extra-territorially, each of the regulators will notify the ITU. Since this is a recommendation, Digicel opted not to proactively seek such approvals from the relevant regulators, but should this issue arise in any jurisdiction, Digicel will then undertake this exercise. Digicel believes it could obtain such approvals without adversely affecting its business or operation if Digicel were required to do so. However, if Digicel is unable to do so, Digicel would incur significant costs to change all Digicel’s customers’ SIM cards, customer disruption as a result of changing the SIM cards, and loss of revenue from roaming and due to customer disruptions and churn.

In Papua New Guinea, the National ICT Authority (“NICTA”) has, through the minister responsible for telecommunications, regulated prepaid mobile prices which has required Digicel PNG, a direct, wholly-owned subsidiary of DPL (“Digicel PNG”), to reduce its tariffs for off-net traffic so that it is no more than 40% higher than on-net traffic. The new regulation took effect in November 2012. NICTA also has the power to regulate wholesale services such as infrastructure sharing and international connectivity or to designate certain services as ‘declared services’ which they can then regulate. NICTA has the authority to arbitrate disputes over interconnect rates where commercial agreement cannot be reached.

In Samoa and Vanuatu, Digicel has been designated as dominant by the respective regulators, which means that Digicel’s operations in those markets are potentially subject to increased levels of regulation. In Samoa, Digicel is subject to retail price regulation. Digicel has also been subject to complaints by the regulator and by

 

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other operators relating to alleged abuses of dominance. Digicel has similarly been subject to complaints of anti-competitive behavior by a competitor in Vanuatu. In addition, there is the possibility that Digicel may be declared “dominant” in certain markets by regulators, which would subject Digicel to additional regulation, including additional regulation on interconnection rates and/or regulation on retail and wholesale pricing of services or adverse regulation only applicable to Digicel.

Digicel Panama, in which the Company owns an indirect 44.97% interest on a fully diluted basis, is the subject of a pending tax audit in Panama pursuant to which the government is seeking material amounts, including penalties and interest. The previous government tax authority (“ANIP”) had notified Digicel Panama that it believes there have been criminal tax violations by Digicel Panama and its legal representatives and officers (which include certain of Digicel’s senior officers). Digicel Panama and its management has vigorously contested such findings as it believes that it has fully co-operated with the tax authorities and made all required disclosures in relation to its tax affairs. In October 2014, the Supreme Court of Panama declared that ANIP had been established in an unconstitutional manner and it was effectively dissolved. However, the resolutions issued by ANIP during its period in being remain in effect. This includes these resolutions issued relating to Digicel Panama. Digicel is presently fully engaged with the new tax authority in Panama known as the DGI, which is part of the Department of Finance, and is hopeful that all matters can be resolved and that all claims of criminal tax violations will be withdrawn. There can be no assurances as to the ultimate resolution, but any adverse outcome could have a material adverse effect on Digicel.

Digicel may be subject to further taxes or fees imposed by various governmental entities.

The telecommunications sector is seen by many governments as a highly profitable sector, and in an effort to increase revenue for the state, governments may impose new fees, taxes or levies directed at Digicel’s sector.

In June 2005 (extended indefinitely in 2008), Jamaica’s Minister for Commerce, Science and Technology imposed a levy of $0.02 on each international incoming call to raise funds from the telecommunications industry for rolling out broadband Internet access to schools and libraries (through a universal service fund). Including this levy, international settlements still remain below the U.S. Federal Communications Commission’s benchmark for Jamaica. At the end of May 2012, the Jamaican Minister of Finance announced a number of new tax measures aimed at raising approximately $60 million for the government in fiscal year 2012 from the telecommunication sector. These new taxes took effect on July 15, 2012 and comprise (a) a $0.075 per minute tax on all incoming international calls terminating on a mobile network in Jamaica (inclusive of all inbound roaming minutes), (b) a J$0.05 per minute tax on all fixed-to-fixed calls originating and terminating in Jamaica, and (c) a J$0.40 per minute tax on all other calls originating from a public mobile network in Jamaica to domestic or international numbers (including outbound roamers). In addition, during the course of 2012 and 2013, the government of Jamaica introduced two new taxes on the telecommunications sector with the stated aim of raising additional government revenue. These include (a) the intent to include the call taxes noted above as part of the general consumption tax base and (b) the requirement for telecommunications providers to charge general consumption tax on the face value of supplies made rather than on the consideration received. While certain of these taxes can be passed through to Digicel’s customers, Digicel needs to absorb others which has impacted its profitability.

In Anguilla, the government introduced a 7% levy on telecommunication services as of November 1, 2010. In Haiti, effective as of June 15, 2011, the government introduced a new tax of $0.05 per minute on incoming international calls. Other Caribbean governments have begun undertaking reviews of companies in the telecommunications sector and have been able to obtain monetary settlements from such companies. Digicel cannot predict the results of any such reviews. In Fiji, Papua New Guinea, Samoa and Vanuatu, the respective governments have considered levying additional universal service obligation charges on network providers. The Minister of Finance in Barbados announced on June 15, 2015 that, effective as of August 1, 2015, a mobile airtime excise duty on cellular phones will be imposed at a nominal rate of $0.03 Barbados dollars (U.S. $0.015) per minute for both service providers in Barbados. No details are yet available as to the precise workings of this

 

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tax or the impact, if any, that it will have on operations in Barbados. Telecommunications operators in Barbados are presently engaged in a process with the Ministry of Finance concerning the proposed measures. Discussions have also taken place in the Organization of Eastern Caribbean States, Jamaica, TCI, the British Virgin Islands and Suriname to impose or increase various taxes on the telecommunications sector. The imposition of these taxes and fees and any other additional taxes and fees by governmental entities in other markets could negatively impact Digicel’s results of operations.

In August 2015, the Government of Trinidad and Tobago approved Universal Service Regulations, which had been pending since 2013. The fees are calculated at 0.5% of gross revenues for domestic telecommunications services and at 1% for international telecommunications services. The USO levy in Trinidad and Tobago is expected to come into effect on October 1, 2015.

The Company, being the holding company of Digicel, may become subject to taxes in Bermuda after March 31, 2035, which may have a material adverse effect on Digicel’s results of operations and shareholders’ investments.

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given the Company assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to the Company or any of its operations, shares, debentures or other obligations until March 31, 2035, except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by the Company in respect of real property owned or leased by it in Bermuda. See “Material Bermuda and U.S. Tax Considerations—Bermuda Tax Considerations”. Given the limited duration of the Bermuda Minister of Finance’s assurance, the Company cannot assure shareholders that it will not be subject to any Bermuda tax after March 31, 2035.

Digicel is subject to taxes in the countries in which it operates, which may reduce amounts Digicel receives from its operations or may increase its tax costs.

Tax returns from previous years may be scrutinized by the local tax authorities and there is a risk that unidentified issues or exposures might arise. Many of the countries in which Digicel operates have increasingly turned to new taxes, as well as aggressive interpretations of current taxes, as a method of increasing revenue. In addition, the provisions of new tax laws may prohibit Digicel from passing these taxes on to Digicel’s local customers. Consequently, these taxes may reduce the amount of earnings that Digicel can generate from its services. If these or other tax assessments are ultimately resolved unfavorably to Digicel, this could reduce amounts Digicel receives from its operations or may increase its tax costs.

Digicel is subject to various anti-corruption laws and regulations.

Digicel is subject to various anti-corruption laws and regulations that prohibit improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business. Digicel has business in countries and regions which are less developed and are generally recognized as potentially more corrupt business environments. Accordingly, Digicel has developed specific internal policies and procedures relating to the prevention of such payments and the reporting of such activities both internally and, where required, to the appropriate external authorities. However, Digicel’s operations in such markets create the risk of unauthorized payments or offers of payments by one of Digicel’s employees or agents that could be in violation of various anti-corruption laws and there is a risk that in certain instances Digicel’s internal policies and procedures may not be adequate. If Digicel or any of its employees or agents is found to have violated any of these anti-corruption laws and regulations, it could have a material adverse effect on Digicel’s business, brand, reputation, financial condition and results of operations.

 

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Risks Relating to Digicel’s Capital Structure

Digicel’s leverage and debt-service obligations could have an adverse effect on its financial health, diminish Digicel’s ability to raise additional capital to fund its operations, limit the amount of cash Digicel has available, for example for acquisitions and cash dividend payments, and limit its ability to react to changes in the economy or the telecommunications industry.

Digicel has a substantial amount of debt and significant debt service obligations. As described in “Use of Proceeds”, Digicel intends to utilise a portion of the net proceeds of this offering to repay between $1.2 billion and $1.3 billion of debt, however, Digicel has not yet determined which specific tranches of debt it will repay. As of June 30, 2015, after giving effect to this offering and the use of proceeds thereof, Digicel’s total consolidated gross debt would have been approximately $5.3 billion assuming net proceeds are used to repay $1.2 billion of debt. For more information on Digicel’s indebtedness, see “Description of Our Indebtedness”. In addition, as of June 30, 2015, DHCAL and its subsidiaries had $393.5 million of total debt, including $63.9 million of non-recourse project finance debt that is guaranteed by DGL and $329.6 million owed to Digicel. We have recognized impairment charges totaling $281.0 million and recorded $25.6 million as our share of losses against the carrying value of the loans. As of June 30, 2015, the carrying value of our investment in DHCAL (including our loans) for accounting purposes was $16.2 million.

Digicel’s substantial current level of indebtedness could have important negative consequences for Digicel. For example, it could:

 

    require Digicel to dedicate a large portion of its cash flow from operating activities to fund payments on its debt, thereby reducing the availability of Digicel’s cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

    increase Digicel’s vulnerability to adverse general economic or industry conditions;

 

    limit Digicel’s flexibility in planning for, or reacting to, changes in its business or the industry in which Digicel operates;

 

    limit the amount of cash available for cash dividend payments;

 

    limit Digicel’s ability to raise additional debt or equity capital in the future or increase the cost of such funding;

 

    restrict Digicel from making strategic acquisitions or exploiting business opportunities;

 

    make it more difficult for Digicel to satisfy its obligations with respect to the agreements governing Digicel’s existing debt; and

 

    place Digicel at a competitive disadvantage compared to its competitors that have less debt.

In the event of significant and/or sustained financial difficulties, there is no guarantee that Digicel would continue to be able to meet all of its debt service obligations, and in the event that inability to meet debt payment obligations resulted in insolvency proceedings or reorganization, investors could lose all or a significant portion of their investment.

A significant increase in its net indebtedness could result in changes in the terms on which credit is extended to Digicel.

A significant increase in Digicel’s net indebtedness could result in changes to the terms on which banks and suppliers are willing to extend credit to Digicel. For example, this could increase Digicel’s costs of financing or cause Digicel to become obligated to make early repayment on some or all of its indebtedness, either of which could have a material adverse effect on Digicel’s business, financial condition and results of operations. See “—Risks Relating to Digicel’s Business, Technology and Competition—Digicel operates in some markets that are considered politically and economically unstable, which could negatively affect its operations”.

 

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Failure to compete effectively with our existing competitors and to adapt to new competition and new technologies or failure to implement our business strategy while maintaining our existing business could result in a loss of revenue and a decline in profitability, a decrease in the value of our business and a downgrade of our credit ratings, which could restrict our access to the capital markets.

Digicel and its subsidiaries may be able to incur substantially more debt.

Subject to the restrictions in the indentures governing Digicel’s outstanding senior notes and in other instruments governing Digicel’s outstanding debt, Digicel and its subsidiaries may be able to incur substantial additional debt in the future, including secured debt. Although the terms of the indentures governing Digicel’s outstanding senior notes and the instruments governing certain of Digicel’s other outstanding debt contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of significant qualifications and exceptions, and debt incurred in compliance with these restrictions could be substantial. To the extent new debt is added to Digicel’s current debt levels, the substantial leverage-related risks described above would increase. For example, Digicel will be required to use a portion of future cash flow from operating activities to service the principal and interest payments on Digicel’s indebtedness, which will reduce the funds available for operations, including capital investments and business expenses.

Digicel’s indebtedness imposes restrictions on its business that limit its ability to take certain actions, including the payment of dividends.

The various debt instruments to which Digicel is a party contain covenants and undertakings that bind Digicel and limit its flexibility in operating its business. For example, these agreements restrict, among other things, Digicel’s ability and certain of its subsidiaries to, among other things:

 

    borrow money;

 

    pay dividends or make other distributions;

 

    create certain liens;

 

    make certain asset dispositions;

 

    make certain loans or investments;

 

    issue or sell share capital of Digicel’s subsidiaries;

 

    issue certain guarantees;

 

    enter into transactions with affiliates; and

 

    amalgamate, merge, consolidate, or sell, lease or transfer all or substantially all of Digicel’s assets.

For example, each indenture governing the Company’s senior notes generally prohibits the payment of dividends except out of a cumulative basket based on an amount equal to the excess of cumulative EBITDA (as defined in such indentures) over 175% of interest expense, subject to certain other tests and certain exceptions. In addition, our subsidiaries have debt facilities that require them to maintain specified ratios and satisfy specified financial tests. The ability of our subsidiaries to meet these financial ratios and tests may be affected by events beyond Digicel’s control and, as a result, Digicel cannot assure you that it will be able to meet these ratios and tests. In the event of a default under the these facilities, the lenders could terminate their commitments and declare all amounts owed to them to be due and payable. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may, as a result, be accelerated and become due and payable. Digicel may be unable to pay these debts in such circumstances. If Digicel were unable to repay those amounts, lenders could proceed against the collateral granted to them to secure repayment of those amounts. Digicel cannot assure you that the collateral will be sufficient to repay in full those amounts and amounts owing to the noteholders. Digicel cannot assure you that the operating and financial restrictions and covenants in these agreements will not adversely affect Digicel’s ability to finance its future operations or capital needs, or engage in other business activities that may be in its interest, or react to adverse market developments. See “Description of Our Indebtedness”.

 

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The Company is dependent upon payments from its subsidiaries to fund payments under the indentures governing its outstanding senior notes, and its ability to receive funds from its subsidiaries is dependent upon the profitability of its subsidiaries and restrictions imposed by law and contracts.

The Company is a holding company that does not itself conduct any business operations. As a result, it relies upon dividends and other payments from its subsidiaries to generate the funds necessary to meet its obligations. Its subsidiaries are separate and distinct legal entities and they will have no obligation to make any funds available to DGL to satisfy obligations, whether by dividend, distribution, loan or other payments.

Certain of our subsidiaries are parties to indentures or similar agreements governing their debt obligations, each of which imposes substantial restrictions on their ability to pay dividends. Any payment of dividends to us to fund debt sources or dividends will be subject to the satisfaction of certain financial conditions set forth in the DIFL Facility, as defined below. Specifically, (a) each indenture of Digicel Limited, or “DL”, our holding company subsidiary of our Caribbean business, generally prohibits the payment of dividends except out of a cumulative basket based on an amount equal to the excess of cumulative EBITDA (as defined under such indentures) over 175% of interest expense, subject to certain other tests and certain exceptions and (b) the DIFL Facility generally only permits dividends if DIFL (the intermediate holding company that owns our Caribbean business) remains in pro forma compliance with its financial maintenance covenants. The ability of our subsidiaries to comply with such conditions may be affected by events that are beyond their control.

A breach of any such conditions could result in a default under the DL Indentures or the DIFL senior secured credit facilities (the “DIFL Facility”), as applicable, and in the event of any such default, the holders of the senior notes issued under the DL Indentures or the lenders under the DIFL Facility could elect to accelerate the maturity of all of the senior notes issued under the DL Indentures or the loans outstanding under the DIFL Facility. If the maturity of the senior notes issued under the DL Indentures or the loans outstanding under the DIFL Facility were to be accelerated, all such outstanding debt would be required to be paid in full before DL, DIFL or certain of their subsidiaries would be permitted to distribute any assets or cash to the Company. Future borrowings by DL, DIFL or their subsidiaries can also be expected to contain restrictions or prohibitions on the payment of dividends by such subsidiaries to us. In addition, if the maturity of the senior notes issued under the DL Indentures or the loans outstanding under the DIFL Facility and the DPL project financing facilities were to be accelerated, then this could constitute a default under the Company’s existing indentures. Furthermore, a payment default, or an acceleration of the maturity of the senior notes issued under the DL Indentures or our indentures could constitute a default under the DIFL Facility, following which the lenders under the DIFL Facility could elect to accelerate the maturity of all of the loans outstanding under the DIFL Facility.

The terms of the various project financings by our South Pacific holding company, “DPL”, and certain of its subsidiaries also impose restrictions on DPL’s and certain of its subsidiaries’ ability to pay dividends to the Company. In Papua New Guinea, DPL’s largest market, the project finance facility permits dividends to be paid to DGL provided it remains in compliance with its covenants and no default or potential event of default exists thereunder. See “Description of Our Indebtedness”.

A breach of any such restriction could result in a default under the DPL project financing facilities, and, in the event of any such default, the lenders under the DPL project financing facilities could elect to accelerate the maturity of all of the loans outstanding under the DPL project financing facilities. If the maturity of the loans outstanding under the DPL project financing facilities were to be accelerated, all such outstanding debt would be required to be paid in full before DPL and certain of its subsidiaries would be permitted to distribute any assets or cash to the Company. Similar restrictions would apply under Digicel Panama’s project financing facilities if it were to become one of Digicel’s subsidiaries.

The ability of Digicel’s subsidiaries to make such payments to the Company will also be subject to, among other things, the availability of profits or funds, applicable laws, such as foreign exchange control and other local laws, including surplus, solvency and other limits imposed on the ability of companies to pay dividends. In

 

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addition, although the Company maintains management control over all of its subsidiaries, the Company has some subsidiaries with local minority equity participants who may object to payment of dividends.

Where Digicel’s cash flow is insufficient for executing its growth strategy, it will be dependent on external sources of capital and access to such sources could be restricted for a variety of reasons.

While Digicel relies on cash flow to fund its assets and operations and interest payments, it may not always generate sufficient cash flow to finance its acquisitions and major capital expenditure projects, and consequently, the execution of Digicel’s growth strategy may sometimes require access to external sources of capital. Any limitations on Digicel’s access to capital on satisfactory terms or at all, could then impair Digicel’s ability to execute its strategy and could reduce its liquidity and ability to make dividend distributions.

No assurance can be given that financing will continue to be available to Digicel on acceptable terms, or at all. Limitations on Digicel’s access to capital, including on its ability to issue additional debt and equity, could result from events or causes beyond Digicel’s control, such decreases in its creditworthiness or profitability, significant increases in interest rates, increases in the risk premium generally required by investors, decreases in the availability of credit or the tightening of terms required by lenders. Any limitations on Digicel’s ability to secure additional capital, continue its existing finance arrangements or refinance existing obligations could limit Digicel’s liquidity, its financial flexibility or its cash flows and affect its ability to execute its strategic plans, which could have a material adverse effect on Digicel’s business, results of operations and financial condition.

A downgrade in our credit ratings could negatively affect our ability to access capital and increase the cost of maintaining our credit facilities and any new debt.

Failure to compete effectively with our existing competitors and to adapt to new competition and new technologies or failure to implement our business strategy while maintaining our existing business could result in a loss of revenue and a decline in profitability, a decrease in the value of our business and a downgrade of our credit ratings, which could restrict our access to the capital markets.

Risks Relating to this Offering and Our Common Shares Structure

Mr. O’Brien, the Company’s founder and Chairman of the Board of Directors, has control over most shareholder decisions as a result of his control of a majority of the Company’s voting shares and will have significant influence over the composition of the Board of Directors, which directs Digicel’s business.

Mr. O’Brien, the Company’s founder and Chairman of the Board of Directors, will be able to exercise voting rights with respect to an aggregate of 193,310,345 Class B common shares, which will represent approximately 94.0% of the voting power of the Company’s issued and outstanding share capital following this offering. In addition, Mr. O’Brien owns 51.9% of DHCAL’s shares on a fully diluted basis. As a result, Mr. O’Brien has significant influence over those matters requiring approval by shareholders, including the election of Directors, amendments to the Company’s and its subsidiaries’ constitutive documents and certain significant corporate transactions and his interests may not in all cases align with other shareholders’ interests.

This concentrated control could delay, defer, or prevent a change of control, amalgamation, merger or consolidation of the Company that the Company’s other shareholders support, or conversely this concentrated control could result in the consummation of such a transaction that the Company’s other shareholders do not support. This concentrated control could also discourage a potential investor from acquiring the Company’s Class A common shares due to the limited voting power of such shares relative to the Class B common shares and might harm the market price of the Company’s Class A common shares. In the event of his death, the shares of the Company that Mr. O’Brien owns will be transferred to the persons or entities that he designates. As a board member and officer, Mr. O’Brien owes a fiduciary duty to the Company and must act in good faith in a manner he reasonably believes to be in the best interests of the Company. As a shareholder, even a controlling shareholder, Mr. O’Brien is entitled to vote his shares in his own interests, which may not always be in the interests of the Company’s shareholders generally.

 

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Our bye-laws provide that the doctrine of “corporate opportunity” will not apply with respect to our directors and their affiliates.

The doctrine of corporate opportunity generally provides that a corporate fiduciary may not develop an opportunity using corporate resources, acquire an interest adverse to that of the corporation or acquire property that is reasonably incident to the present or prospective business of the corporation or in which the corporation has a present or expectancy interest, unless that opportunity is first presented to the corporation and the corporation chooses not to pursue that opportunity. The doctrine of corporate opportunity is intended to preclude officers or directors or other fiduciaries from personally benefiting from opportunities that belong to the corporation. Our bye-laws, which will be effective prior to the closing of this offering, provide, to the fullest extent permitted by law, that directors and their affiliates are not required to offer any corporate opportunity of which they become aware to us and are able to take any such opportunity for themselves, unless such opportunity is offered to them solely in their capacities as our directors. See “Description of Share Capital—Corporate Opportunity Waiver”.

As a result, certain of our shareholders, directors and their respective affiliates will not be prohibited from operating or investing in competing businesses. We therefore may find ourselves in competition with certain of our shareholders, directors or their respective affiliates, and we may not have knowledge of, or be able to pursue, transactions that could potentially be beneficial to us. Accordingly, we may lose a corporate opportunity or suffer competitive harm, which could negatively impact our business or prospects.

Digicel’s agreement with Mr. O’Brien on the use of the Digicel brand name outside of its current markets may adversely affect Digicel’s reputation and limit its ability to expand into other regions.

Digicel has entered into a co-existence agreement with a company controlled by Mr. O’Brien. Pursuant to the agreement, outside of North America, Central America, South America, the Caribbean and the South Pacific, Mr. O’Brien may use the Digicel brand name, and Digicel may not use it absent the entry into license agreements. The restrictions imposed by this agreement may adversely affect Digicel’s ability to use Digicel’s brand and compete effectively. In addition, Mr. O’Brien could use the Digicel brand name in a manner that adversely affects Digicel’s reputation. In particular, in the event that we wanted to expand our operations to countries outside of North America, Central America, South America, the Caribbean or the South Pacific, we would have to enter into new arrangements with Mr. O’Brien for the use of the Digicel brand in those countries. We cannot assure you that we would be able to do so on satisfactory terms or at all. This could limit our future growth. See “Certain Relationships and Related Party Transactions—Related Party Transactions—Co-Existence Agreements”.

The dual class structure of the Company’s common shares has the effect of concentrating voting control with Mr. O’Brien; this will limit or preclude your ability to influence corporate matters.

The Company’s Class B common shares have ten votes per share, and the Company’s Class A common shares, which are the shares the Company is offering in this offering, have one vote per share. Shareholders who hold Class B common shares, including Mr. O’Brien, the Company’s founder and Chairman of the Board of Directors, will together beneficially own approximately 94.0% of the voting power of the Company’s issued and outstanding share capital following its initial public offering. Because of the ten-to-one voting ratio between the Company’s Class B and Class A common shares, the holders of the Company’s Class B common shares collectively will continue to control a majority of the combined voting power of the Company’s common shares and therefore be able to control most matters submitted to the Company’s shareholders for approval so long as the Class B common shares represent at least 10% of all issued and outstanding Class A and Class B common shares. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.

Future transfers by holders of Class B common shares will generally result in those shares converting to Class A common shares, subject to limited exceptions, such as certain transfers effected to members of

 

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Mr. O’Brien’s immediate family, for estate planning or charitable purposes. The conversion of Class B common shares to Class A common shares will have the effect, over time, of increasing the relative voting power of those holders of Class B common shares who retain their shares in the long-term. If, for example, Mr. O’Brien retains a significant portion of his holdings of Class B common shares for an extended period of time, he could, in the future, continue to control a majority of the combined voting power of the Company’s Class A common shares and Class B common shares.

An active market for our Class A common shares may not develop and if such a market does develop, the price of common shares is subject to volatility.

Before this offering, no public market for our Class A common shares has existed. The initial public offering price for our Class A common shares will be determined by negotiations between us and the representatives for the underwriters. An active public market for our shares may not develop or be sustained after this offering. Even if an active market develops, the market price for our shares may fall below the initial public offering price. The market price of our shares could be subject to significant fluctuations due to a variety of factors, including actual or anticipated fluctuations in our operating results and financial performance, economic downturns, political events in the jurisdictions where we operate or other changes in our industries, changes in financial estimates by securities analysts, the introduction of new products or technologies by us or our competitors, or our failure to meet expectations of analysts or investors.

Volatility in our share price could subject us to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because telecommunications companies have experienced significant share price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could adversely affect our financial condition or results of operations.

Substantial sales of our Class A common shares after this offering may adversely affect our share price.

The market price for our shares could decline as a result of sales of our Class A common shares by our shareholders after this offering, or the perception that these sales could occur. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

The 124,137,931 Class A common shares being sold in this offering will be freely transferable under the U.S. securities laws immediately after issuance, except for any shares sold to our affiliates. Our directors, officers and an entity controlled by Mr. O’Brien, who will collectively own 100,000 of our Class A common shares and 193,310,345 of our Class B common shares after this offering, have agreed under written lock-up agreements that they will not sell their shares for 180 days following the date of this prospectus without the prior written consent of the underwriters, subject to various exceptions. However, after the expiration or waiver of the lock-up agreements, a large number of additional common shares held by our shareholders will be transferable without restriction (or earlier if the transfer is permitted by an exception to the lock-up or is with the underwriter’s consent). Following the expiration of the lock-up period, shareholders owning approximately 193,310,345 of our Class B common shares will be entitled, under a registration rights agreement, to exercise their demand registration rights to register their Class A common shares under the Securities Act. If this right is exercised, such shareholders could sell a large number of shares pursuant to the registration rights and cause the price of our Class A common shares to decline. One of the exceptions in the lockup agreements permits our shareholders to pledge or grant liens in any or all of their shares, including to banks as collateral or security for loans, and any foreclosure upon such shares could result in sales of a substantial number of our Class A common shares into the public market, which could decrease the market price of our Class A common shares. See “Shares Eligible For Future Sale” and “Certain Relationships and Related Party Transactions—Registration Rights Agreement” for more information.

 

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Investors will experience immediate and substantial dilution.

The estimated initial public offering price of our Class A common shares is substantially higher than the net tangible book value per share of our Class A common shares immediately prior to the offering. If you purchase Class A common shares in this offering, you will experience immediate and substantial dilution in the net tangible book value per share relative to the public offering price of Class A common shares. See “Dilution”.

You may be diluted by the future issuance of additional Class A common shares in connection with our incentive plans, acquisitions, conversions of our Class B common shares into Class A common shares or otherwise.

The Board of Directors has authorized an aggregate of 30,000,000,000 common shares, which it can designate as Class A common shares or Class B common shares at the time of issuance. After this offering we will have approximately 29,682,451,724 Class A and Class B common shares authorized but unissued. Our amended and restated bye-laws to become effective as of the closing of this offering authorizes us to issue this amount of Class A common shares and options, rights, warrants and appreciation rights relating to Class A common shares for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 15,632,172 shares for issuance under incentive compensation plans. See “Management—Compensation”. In addition, upon transfer of any of our Class B common shares by a Class B holder (except in permitted transfers), or if the holders of Class B common shares own Class B common shares representing less than 10% of our total issued and outstanding common shares, Class B common shares will automatically convert into Class A common shares, increasing the number of issued and outstanding Class A common shares. See “Description of Share Capital—Common Shares—Conversion, Transferability and Exchange”. Any common shares that we issue, including under any equity incentive plan or upon conversions of our Class B common shares, would dilute the percentage ownership held by the investors who purchase Class A common shares in this offering.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a company listed in the U.S., we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the NYSE rules promulgated in response to the Sarbanes-Oxley Act. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual and other reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. In addition, as our strategy includes pursuing acquisition opportunities, we will need to use resources to integrate any new business we acquire into our disclosure controls and procedures and our internal control processes. As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. We will need to hire more staff to comply with these requirements, which will increase our costs. We may have difficulty locating qualified personnel.

We will be exposed to risks relating to the evaluation of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act.

We will need to evaluate, test and implement internal controls over financial reporting to enable management to report on, and our independent registered accounting firm to attest to, such internal controls as

 

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required by Section 404 of the Sarbanes-Oxley Act beginning with our second annual report after this offering. We cannot be certain as to the timing of the completion of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal controls and the hiring of additional personnel. Any such actions could negatively affect our results of operations.

As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain disclosure and corporate governance standards applicable to U.S. issuers. This may be less favorable to holders of our Class A common shares.

As a foreign private issuer, we are not subject to the same disclosure and procedural requirements as domestic U.S. registrants under the Exchange Act. For instance, we are not required to prepare and file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act, we are not subject to the proxy requirements under the Exchange Act, and we are not generally required to comply with Regulation FD, which restricts the selective disclosure of material non-public information. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act. Moreover, we will be permitted to disclose compensation information for our executive officers on an aggregate, rather than an individual, basis because individual disclosure is not required under Bermuda law.

As a foreign private issuer, we have the option to follow certain Bermuda corporate governance practices rather than those applicable to domestic companies listed on the NYSE, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the home country practices we follow instead. We intend to rely on this “foreign private issuer exemption” with respect to the following NYSE requirements:

 

    Independent Directors. Under the rules of the NYSE, a U.S. domestic listed company, other than a controlled company, must have a majority of independent directors on its board. Under Bermuda law, there is no requirement to appoint any independent directors. Following the consummation of this offering, four of our ten directors will be independent under the NYSE rules.

 

    Independent Remuneration Committee. Under the rules of the NYSE, a U.S. domestic listed company, other than a controlled company, must have a remuneration committee comprised only of independent directors. Under Bermuda law, there is no requirement to appoint any independent directors. Two of the three directors on the remuneration committee are not independent.

 

    Independent Oversight of Director Nomination Process. Under the rules of the NYSE, a U.S. domestic listed company, must have a nominating/corporate governance committee composed entirely of independent directors. Our nominating committee is comprised of non-independent directors.

 

    Audit Committee Members. Under the rules of the NYSE, a U.S. domestic listed company, must have an audit committee comprised of three directors. Our audit committee is comprised of only two directors.

 

    Meetings of Non-Management Directors. Under the rules of the NYSE, non-management directors of a U.S. domestic listed company must hold regularly scheduled “executive sessions” without management participation. In addition, the NYSE rules require an annual executive session of only independent directors. Under Bermuda law, there is no requirement to hold regularly scheduled “executive sessions” without management participation or a requirement to have an annual executive session of only independent directors, and our bye-laws do not require such sessions.

 

   

Shareholder Voting. Under the rules of the NYSE, shareholders must be given the opportunity to vote on issuances of equity securities above specified thresholds and equity-compensation plans and

 

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material revisions thereto, with certain limited exemptions. However, Bermuda law and our bye-laws do not require shareholder approval for the issuance of authorized but unissued shares.

We may in the future elect to follow home country practices in Bermuda with regard to other matters. As a result, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements. See “Management—Corporate Governance Practices”.

We will lose our foreign private issuer status if we fail to meet the requirements under U.S. securities laws necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to prepare and report our consolidated financial statements in accordance with generally accepted accounting principles in the United States rather than IFRS, as issued by the IASB, and that transition would involve significant cost and time. We would also be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on the NYSE that are available to foreign private issuers.

We intend to pay dividends to our shareholders, but the payment of dividends will depend on Digicel’s financial condition and results of operations, as well as on its operating subsidiaries’ distributions to the Company.

For the fiscal years ended March 31, 2013, 2014 and 2015, the Company has paid a regular quarterly dividend of $10 million per quarter and the Company’s current intention for fiscal year 2016, subject to the discretion of the Board of Directors and considerations discussed here, is to pay dividends in line with its historical quarterly dividend. In future years, the Company intends to evaluate increasing its distributions to shareholders based on its operating free cash flow available to equityholders to the extent that doing so is consistent with its growth objectives, further development of its networks and value enhancing acquisitions. See “Dividend Policy.”

The amount of dividends paid by the Company will depend on, among other things, the Company’s future operating results, cash flows, financial position, capital requirements, the sufficiency of its distributable reserves, the ability of the Company’s subsidiaries to pay dividends to the Company, the ability of the Company to pay dividends pursuant to Bermuda law, its debt agreements, credit terms, general economic conditions and other factors that the Company may deem to be significant from time to time. Furthermore, because the Company is a holding company that conducts its operational business mainly through its subsidiaries, the Company’s ability to pay dividends depends directly on the Company’s operating subsidiaries’ distributions to the Company. See “—Risks Relating to Digicel’s Capital Structure—The Company is dependent upon payments from its subsidiaries to fund payments under the indentures governing its outstanding senior notes, and its ability to receive funds from its subsidiaries is dependent upon the profitability of its subsidiaries and restrictions imposed by law and contracts”. The amount and timing of such distributions will depend on the laws of the operating companies’ respective jurisdictions. The declaration by the Company of a dividend or a bonus issue of shares is subject to the prior approval of the Board of Directors. Any of these factors, individually or in combination, could restrict the Company’s ability to pay dividends. Accordingly, there can be no assurance that the Board of Directors will not reduce the amount of dividends or cause the Company to cease paying dividends altogether.

We are a Bermuda company with operations located in various countries outside the United States and it may be difficult for you to enforce judgments against us or our directors and executive officers.

We are a Bermuda exempted company. As a result, the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and our bye-laws. The rights of shareholders

 

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under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. Most of our directors and some of the named experts referred to in this prospectus are not residents of the United States, and a substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the United States or to enforce in the United States judgments obtained in the U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda or the other countries where we have significant assets, or where our directors and officers are located will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda or the other countries where we have significant assets, or where our directors and officers are located against us or our directors or officers under the securities laws of other jurisdictions. See “Service of Process and Enforcement of Judgments”.

Bermuda law differs from the laws in effect in the U.S. and may afford less protection to holders of the Company’s Class A common shares.

The Company is an exempted company with limited liability incorporated under the laws of Bermuda. As a result, the Company’s corporate affairs are governed by the Companies Act 1981 of Bermuda, (as amended), which differs in some material respects from laws typically applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, amalgamations, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. In addition, generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies typically do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Class actions are not available under Bermuda law. The circumstances in which derivative actions may be available under Bermuda law are substantially more proscribed and less clear than they would be to shareholders of U.S. corporations. The Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company’s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company’s shareholders than that which actually approved it.

When the affairs of a company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company. Additionally, under the Company’s bye-laws and as permitted by Bermuda law, each shareholder has waived any claim or right of action against the Company’s directors or officers for any action taken by directors or officers in the performance of their duties, except for actions involving fraud or dishonesty. In addition, the rights of holders of the Company’s common shares and the fiduciary responsibilities of the Company’s directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the U.S. Therefore, holders of the Company’s common shares may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction within the U.S.

For a more detailed comparison of the significant differences between the Bermuda Companies Act and Bermuda common law and the Delaware General Corporations Law in “Description of Share Capital—Bermuda Company Considerations”.

The Company has anti-takeover provisions in its bye-laws that may discourage a change of control.

Our bye-laws contain provisions that could make it more difficult for a third-party to acquire the Company. These provisions provide for:

 

   

a dual class common share structure, which, until the Class B common shares held by Mr. O’Brien, his affiliates and permitted transferees, represent less than 10% of the Company’s issued and outstanding

 

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common shares, resulting in the Class B common shares automatically converting into Class A common shares (the “10% Automatic Conversion”), will provide Mr. O’Brien the ability to control the outcome of most matters requiring shareholder approval, even if he owns significantly less than a majority of the issued and outstanding Class A and Class B common shares;

 

    upon the 10% Automatic Conversion occurring, certain amendments to our bye-laws will require the affirmative vote of shares carrying not less than two-thirds of the total voting rights of all issued and outstanding common shares;

 

    the power to increase the size of the Board of Directors may only be exercised by the Board of Directors and this will prevent a shareholder from increasing the size of the Board of Directors, and gaining control of the Board of Directors by filling the resulting vacancies with its own nominees;

 

    upon the 10% Automatic Conversion occurring, the Board of Directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause;

 

    upon the 10% Automatic Conversion occurring, the shareholders will only be able to take action at a general meeting of shareholders and not by written consent;

 

    advance notice procedures will apply for shareholders to nominate candidates for election as directors or to bring matters before an annual general meeting of shareholders;

 

    the Board of Directors to determine the powers, preferences, rights and limitations of the Company’s preference shares and to issue such preference shares without any further shareholder approval; and

 

    upon the 10% Automatic Conversion occurring, certain mergers or amalgamations not approved by the Board of Directors will require the affirmative vote of shares carrying not less than two-thirds of the total voting rights of all issued and outstanding shares.

After the completion of this offering, Mr. O’Brien, the Company’s founder and Chairman of the Board of Directors, will beneficially own in the aggregate approximately 94.0% of the combined voting power of the Company’s common shares (or 93.1% assuming the exercise of the option held by the underwriters to purchase additional shares in full).

These provisions could make it more difficult for a third-party to acquire the Company, even if the third-party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares. See “Description of Share Capital” for a discussion of these provisions.

There can be no assurance that Digicel will not be a passive foreign investment company, or a PFIC, for any taxable year, which treatment could result in adverse U.S. federal income tax consequences to U.S. holders of the Class A common shares.

The Company believes that it was not a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for its 2014 taxable year and it does not expect to become one for the current taxable year or in the foreseeable future. In general, a foreign corporation is a PFIC for any taxable year if: (i) 75% or more of its gross income consists of passive income (such as dividends, interest, rents and royalties) or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. Because PFIC status depends on the composition of a company’s and its subsidiaries’ income and assets and the market value of its assets from time to time, there can be no assurance that the Company will not be a PFIC for the current taxable year or any future taxable year. If the Company were a PFIC for any taxable year during which a U.S. person held the Class A common shares, certain adverse U.S. federal income tax consequences could apply to such U.S. person. See “Material Bermuda and U.S. Tax Considerations—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules”.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains various forward-looking statements that reflect management’s current views with respect to future events and anticipated financial and operational performance. The words “expect,” “estimate,” “believe,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “may,” “target,” “goal,” “objective” and similar expressions or variations on such expressions are considered forward-looking statements. Other forward-looking statements can be identified in the context in which the statements are made. These statements appear in a number of places throughout the document, including, without limitation, in “Risk Factors,” “Use of Proceeds,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These statements concern, among other things:

 

    strategies, outlooks and growth prospects;

 

    new products and services;

 

    future plans and potential for future growth;

 

    trends affecting our financial condition or results of operations;

 

    liquidity, capital resources and capital expenditure;

 

    growth in demand for our services;

 

    economic outlook and industry trends;

 

    development of our markets;

 

    the impact of regulatory initiatives and the supervision and regulation of the telecommunications markets in general;

 

    political instability in the markets in which we operate;

 

    operating risks including natural disasters;

 

    possible renewal of licenses;

 

    competition in areas of our business; and

 

    plans to launch new networks, products and services.

Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties; actual results may differ materially as a result of various factors. These factors include, but are not limited to:

 

    general economic conditions, the fluctuations or devaluations of local currencies, government and regulatory policies and business conditions in the markets served by us and our affiliates and in markets in which we seek to establish operations;

 

    telecommunications usage levels, including traffic and customer growth;

 

    competitive forces, including price pressures, technological developments and our ability to retain market share in the face of competition from existing and new market entrants;

 

    regulatory developments and changes, including with respect to the level of tariffs, the terms of interconnection, customer access and international settlement arrangements and the outcome of litigation related to regulation and regulatory processes generally;

 

    the success of business, operating and financial initiatives, the level and timing of the growth and profitability of new initiatives, start-up costs associated with entering new markets, subscriber acquisition costs, costs of handsets and other equipment, the successful deployment of new systems and applications to support new initiatives and local conditions;

 

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    the availability, terms and use of capital, the impact of regulatory and competitive developments on capital outlays, the ability to achieve cost savings and realize productivity improvements, and the success of our investments, ventures and alliances; and

 

    other factors discussed under “Risk Factors”.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, as actual results could differ. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

Please note that we provide a cautionary discussion of risks and uncertainties under “Risk Factors” of this prospectus. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could also adversely affect us.

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $1.7 billion, assuming an initial public offering price of $14.50 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us (including a 0.33% fee of the gross proceeds of this offering to an affiliate of our controlling shareholder, Island Capital, for advisory services).

We intend to use approximately $1.3 billion of net proceeds from this offering to repay or retire our existing indebtedness and pay any breakage costs, including pre-payment premiums. The terms of Digicel Group Limited and Digicel Limited’s senior notes and the Murabaha Facility in respect of our operations in Myanmar only permit a prepayment with a premium. All of our other indebtedness (including the senior credit facilities) can be prepaid at any time without a premium (subject to customary breakage costs if prepayment occurs on a date other than an interest payment date).

We have not yet determined which debt we will repay and whether we will repay such debt through tender offers, open market repurchases or redemption, and expect to make such decision following completion of the offering based on market conditions and trading levels of our debt at such time, while also taking into account interest cost, prepayment cost and maturity of our various debt instruments. As a result, we cannot quantify the amount of debt reduction.

If we were to repay debt with the lowest prepayment premiums (including our senior credit facilities), with the net proceeds that we expect to use to repay debt, we would repay approximately $1.3 billion of debt. Alternatively, we have the ability to redeem up to 35% of Digicel Group Limited’s 2022 Notes and Digicel Limited’s 2021 and 2023 Notes with the proceeds of an IPO (an “Equity Claw-back”), at specified redemption premiums, from the net proceeds from this offering (these are the highest stated redemption premiums currently applicable to our debt, excluding the redemption premiums applying to “make-whole” provisions which we do not intend to utilize as of the date of this prospectus based on prevailing interest rates). If we were to do so and use the remainder of the allocated proceeds to prepay other indebtedness, we would repay approximately $1.2 billion of debt. For detailed information on the interest rates and maturity dates of our senior credit facilities and senior notes, see “Description of Indebtedness.”

The amount of debt repaid and annual interest savings will ultimately depend on the specific debt that is repaid or retired and the mechanism by which such debt is repaid or retired including the impact of the applicable interest rate and any applicable prepayment premium.

We intend to use the remaining net proceeds from this offering for general corporate purposes, including capital expenditures and acquisitions, although we have no current understandings, commitments or agreements to do so. We do not expect that any proceeds will be used to fund dividends to common shareholders.

Affiliates of certain underwriters in this offering are lenders under our senior credit facilities and therefore may receive a portion of the net proceeds of this offering. See “Underwriting.”

 

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DIVIDEND POLICY

The proceeds of this offering are intended to be used for the purposes described in “Use of Proceeds” and are not intended to be used for a dividend payment. For the fiscal years ended March 31, 2013, 2014 and 2015, the Company has paid a regular quarterly dividend of $10 million per quarter and the Company’s current intention for fiscal year 2016, subject to the discretion of the Board of Directors and considerations discussed herein, is to pay dividends in line with its historical quarterly dividend. In future years, the Company intends to evaluate increasing its distributions to shareholders based on its operating free cash flow available to equityholders to the extent that doing so is consistent with its growth objectives, further development of its networks and value enhancing acquisitions.

The Company’s ability to pay dividends on its Class A common shares and Class B common shares is limited, among other things, by restrictions on the ability of its subsidiaries and of the Company to pay dividends or make distributions under the terms of Digicel’s bank borrowings and senior notes. See “Risk Factors—Risks Relating to this Offering and our Common Shares Structure—The payment of future dividends will depend on Digicel’s financial conditions and results of operations, as well as on its operating subsidiaries’ distributions to the Company” and “Risk Factors—Risks Relating to Digicel’s Capital Structure”. In addition, under Bermuda law, a company may not declare or pay dividends if there are reasonable grounds for believing that: (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) that the realizable value of its assets would thereby be less than its liabilities. Under our bye-laws, the Board of Directors determines which part of any profit will be reserved. Also, under our bye-laws, each common share is entitled to dividends if, as and when dividends are declared by the Board of Directors, subject to any preferred dividend right of the holders of any preference shares.

For the years ended March 31, 2015, 2014 and 2013, the Company made total dividend payments of $40.0 million, $690.0 million and $340.0 million, respectively, which were comprised of dividend payments to holders of common shares of $21.7 million, $671.7 million and $321.7 million, respectively, and to holders of preferred shares of $18.3 million for each period. Such payments consisted of a regular quarterly dividend of $10 million (for a total of $40 million per annum), a $650 million special dividend paid in February 2014 and a $300 million special dividend paid in the quarter ended June 30, 2012. The Company does not have plans for further special dividend payments. For the three months ended June 30, 2015, the Company made its regular quarterly dividend payments of $10.0 million, which were comprised of dividend payments to holders of common shares of $5.4 million and to holders of preferred shares of $4.6 million. In connection with this offering, our preferred shares will be exchanged into Class B common shares, and accrued and unpaid dividends thereon to the date of conversion (payable at a rate of 9.5% per annum for the period from July 1, 2015 to the closing date of this offering) will be paid in cash to the holders of our preferred shares. Upon completion of this offering, no preferred shares will be issued and outstanding.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and consolidated capitalization at June 30, 2015:

 

    on an actual basis, except to the extent it has been adjusted to give effect to the Common Share Exchange;

 

    on a pro forma basis to give effect to a share capital restructuring in connection with this offering under which our 180,100,000 common shares will be reclassified into 100,000 Class A common shares and 180,000,000 Class B common shares and our 193,000 issued and outstanding Series A Perpetual Preferred Stock will be exchanged into 13,310,345 Class B common shares in connection with the offering (based on the midpoint of the price range on the cover of this prospectus; the actual number of shares to be issued upon exchange will equal the liquidation preference or nominal value of $193.0 million divided by the price to the public in this offering);

 

    on a pro forma as adjusted basis to give effect to this offering and the indicative application of the net proceeds as described under “Use of Proceeds” on the assumption that approximately $1.2 billion is used to repay existing indebtedness, which reflects the amount of principal to be repaid if we redeem the debt at the highest stated redemption premiums currently applicable to our debt (excluding the redemption premiums applying to “make-whole” provisions which we do not intend to utilize as of the date of this prospectus based on prevailing interest rates), although the debt reduction could be approximately $1.3 billion if we were to repay debt with the lowest prepayment premiums.

You should read this table together with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, which are included in this prospectus.

 

    At June 30, 2015  
    Actual     Pro Forma     Pro Forma as
Adjusted
 
    (in millions, except share data)  

Cash and cash equivalents(1)

  $ 312.5      $ 312.5      $ 712.5   
 

 

 

   

 

 

   

 

 

 

Current portion of long-term debt(2)

    88.3        88.3        88.3   

Long-term debt(2)

    6,450.7        6,450.7        5,213.9   

Shareholders’ deficit:

     

Series A Perpetual Preferred Stock, $1,000 par value; 250,000 shares authorized, 193,000 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

    193.0        —         —    

Preferred shares, $0.01 par value; no shares authorized, no shares issued and outstanding, actual; 5,000,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

    —         —         —    

Common shares, $0.01 par value; 15,700,000,000 shares authorized, 180,100,000 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

    1.8        —         —    

Class A common shares, $0.01 par value; no shares authorized, issued and outstanding, actual; 30,000,000,000 shares authorized, 100,000 shares issued and outstanding pro forma; 30,000,000,000 shares authorized, 124,237,931 shares issued and outstanding pro forma as adjusted(3)

    —         0.0        1.2   

Class B common shares, $0.01 par value; no shares authorized, issued and outstanding, actual; 30,000,000,000 shares authorized, 193,310,345 shares issued and outstanding pro forma; 30,000,000,000 shares authorized, 193,310,345 shares issued and outstanding pro forma as adjusted(3)

    —         1.9        1.9   

Contributed capital(4)

    113.0        305.8        2,016.7   

Foreign exchange translation reserve

    (399.6     (399.6     (399.6

Accumulated deficit(5)

    (2,933.2     (2,933.2     (3,008.4

Non-controlling interests

    74.2        74.2        74.2   
 

 

 

   

 

 

   

 

 

 

Total shareholders’ deficit

    (2,950.8     (2,950.8     (1,314.0
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 3,588.2      $ 3,588.2      $ 3,988.2   
 

 

 

   

 

 

   

 

 

 

 

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(1) Excludes restricted cash of $11.3 million.
(2) Long-term debt is gross debt before deferred financing fees and accrued interest. Long-term debt includes an aggregate principal amount of $3.0 billion of Digicel Group Limited senior notes, an aggregate principal amount of $2.475 billion of Digicel Limited senior notes, $879.4 million outstanding under the Digicel International Finance senior credit facilities, $65.4 million outstanding under Digicel Pacific Limited facilities, $60.0 million outstanding under the Murabaha Facility in respect of operations in Myanmar, $26.5 million outstanding under the loan facility for Turgeau Developments S.A. and $32.6 million in other loans, including $1.7 million of shareholder loans from minority shareholders to our subsidiaries. See “Description of Our Indebtedness”.
(3) The Board of Directors has authorized an aggregate of 30,000,000,000 common shares, which it can designate as Class A common shares or Class B common shares at the time of issuance.
(4) Includes share premium.
(5) Pro forma as adjusted balance sheet information does not reflect the write-off of deferred unamortized financing fees in connection with the use of proceeds from this offering.

Each $1.00 increase or decrease in the assumed initial public offering price of $14.50 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease each of cash and cash equivalents, total assets, total debt, accumulated deficit and total shareholders’ (deficit), on a pro forma as adjusted basis, by approximately $119.2 million, assuming that the number of Class A common shares offered by Digicel, as set forth on the cover page of this prospectus, remains the same. Digicel may also increase or decrease the number of Class A common shares it is offering. Each increase or decrease by 1,000,000 Class A common shares offered by Digicel would increase or decrease each of cash and cash equivalents, total assets, total debt, accumulated deficit and total shareholders’ deficit by approximately $13.9 million, assuming that the assumed initial price to the public remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by Digicel. If the assumed initial public offering price was $13.00 per share or $16.00 per share, which is the price range on the cover page of this prospectus, the number of Class B common shares issued upon exchange of our issued and outstanding 193,000 Series A Perpetual Preferred Stock would be 14,846,153 or 12,062,500 shares, respectively.

 

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DILUTION

Our pro forma net tangible book deficit as of June 30, 2015 was $(4,562.4) million or $(23.59) per common share. Pro forma tangible book deficit per share is determined by dividing the tangible net worth of Digicel, by the aggregate number of common shares issued and outstanding, assuming that our common shares issued and outstanding before the offering are reclassified into 100,000 Class A common shares and 180,000,000 Class B common shares and our 193,000 Series A Perpetual Preferred Stock are exchanged into Class B common shares. Tangible net worth is defined as total assets, less intangible assets, minus total liabilities. After giving effect to the sale by Digicel of 124,137,931 Class A common shares in this offering, at an assumed initial public offering price of $14.50 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the receipt and application of the net proceeds, Digicel’s pro forma as adjusted net tangible book deficit at June 30, 2015 would have been $(2,925.5) or $(9.21) per share. This represents an immediate reduction in pro forma as adjusted net tangible book deficit to existing shareholders of $14.38 per share and an immediate dilution to new investors of $(23.71) per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price (the midpoint of the estimated price range set forth on the cover of this prospectus)

     $ 14.50   

Historical net tangible book deficit per share as of June 30, 2015

     (25.33  

Reduction in pro forma net tangible book deficit attributable to exchange of preferred shares

     1.74     
  

 

 

   

Pro forma net tangible book deficit per share as of June 30, 2015

     (23.59  

Reduction in pro forma net tangible book deficit per share attributable to new investors

     14.38     
  

 

 

   

Pro forma as adjusted net tangible book deficit per share after offering

       (9.21
    

 

 

 

Dilution per share to new investors

     $ (23.71
    

 

 

 

Dilution is determined by subtracting pro forma as adjusted net tangible book deficit per share after the offering from the initial public offering price per share.

A $1.00 increase (decrease) in the assumed initial public offering price of $14.50 per share, which is the midpoint of the price range on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and would decrease (increase) the pro forma as adjusted net tangible book deficit after this offering by $119.2 million and the dilution per share to new investors by $0.65, assuming the number of Class A common shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATIONAL INFORMATION

The following tables set forth our selected historical financial and operational information for the periods ended and as of the dates indicated below. The selected historical financial information for the periods ended March 31, 2015, 2014 and 2013 and as of March 31, 2015 and 2014 is derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical financial information for the periods ended March 31, 2012 and 2011 and as of March 31, 2013, 2012 and 2011 is derived from our audited consolidated financial statements, which are not included in this prospectus. The unaudited interim consolidated financial statements reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results in the six months ended June 30, 2015 are not necessarily indicative of results to be expected for the full year or any other period.

The selected historical financial information as of June 30, 2015 and 2014 and for the three month periods then ended is derived from our unaudited interim consolidated financial statements, which are included elsewhere in this prospectus.

We report under IFRS, as issued by the IASB. We have made a number of acquisitions over the last several years and our consolidated financial statements include results of operations for the acquired entities from the date of acquisition. Digicel accounts for its investment in DHCAL as an associate in accordance with IFRS, as issued by the IASB. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Digicel’s Business—Acquisitions” and “Business” for more information about our acquisitions.

The following summary data for the periods and as of the dates indicated are qualified by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, which are included in this prospectus.

 

     Three Month
Period Ended
June 30,
    Year Ended March 31,  
     2015     2014     2015     2014     2013     2012     2011  
    

(in millions, except share data, share numbers, percentages and
subscriber data)

 

Consolidated Income Statement Data:

              

Revenue

   $ 669.7      $ 678.6      $ 2,794.1      $ 2,753.6      $ 2,777.3      $ 2,569.0      $ 2,230.5   

Direct operating and subscriber acquisition costs

     (174.4     (183.1     (753.9     (743.7     (764.7     (740.9     (634.2

Other operating expenses

     (149.3     (142.6     (610.1     (543.6     (582.8     (530.4     (454.2

Staff Costs

     (79.4     (74.5     (317.0     (278.7     (264.5     (274.0     (221.4

Depreciation, amortization and impairment of property, plant and equipment and intangible assets

     (101.6     (93.5     (405.3     (395.2     (410.6     (399.3     (351.4

Other operating income

     —          —          —          —          —          14.7        6.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     165.0        184.9        707.8        792.4        754.7        639.1        575.7   

Finance Income

     0.2        0.8        2.7        16.9        2.9        6.9        31.4   

Finance Costs(1)

     (129.9     (184.6     (599.3     (505.1     (565.0     (414.4     (383.3

Share of Loss of Associates

     (6.5     (4.2     (21.1     (7.8     (2.2     (23.7     (57.8

Impairment of Loan to Associate and Investments

     (15.8     —          (58.7     (39.0     (176.0     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before Taxation

     13.0        (3.1     31.4        257.4        14.4        207.9        166.0   

Taxation

     (44.4     (49.4     (189.0     (213.9     (212.9     (160.7     (122.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss)/Profit

   $ (31.4   $ (52.5   $ (157.6   $ 43.5      $ (198.5   $ 47.2      $ 43.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net (loss)/profit per share attributable to common shareholders(2)

   $ (0.19   $ (0.34   $ (1.04   $ 0.07      $ (1.27   $ 0.26      $ 0.21   

Weighted average common shares used in computing net (loss)/profit per share-basic and diluted (in millions)(2)

     180.1        180.1        180.1        180.1        180.1        180.1        180.1   

 

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     Three Month
Period Ended June
30,
    Year Ended March 31,  
     2015     2014     2015     2014     2013     2012     2011  
    

(in millions, except share data, share numbers, percentages and subscriber
data)

 

Consolidated Statement of Cash Flows:

              

Net cash provided by operating activities

   $ 68.5      $ 148.3      $ 433.4      $ 448.4      $ 561.1      $ 505.2      $ 431.7   

Net cash used in investing activities

     (257.7     (175.6     (865.6     (605.6     (415.7     (669.8     (1,170.3

Net cash provided by/(used in) financing activities

     1.5        159.8        280.2        (270.2     280.3        210.3        314.1   

Effects of exchange rate changes on cash and cash equivalents

     0.4        (0.2     (3.7     1.4        (0.8     (2.4     (3.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease)/increase in cash and cash equivalents

     (187.3     132.3        (155.7     (426.0     424.9        43.3        (427.5

Cash and cash equivalents at beginning of period

     499.8        655.5        655.5        1,081.5        656.6        613.3        1,040.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period(3)

   $ 312.5      $ 787.8      $ 499.8      $ 655.5      $ 1,081.5      $ 656.6      $ 613.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

              

Depreciation and Amortization

   $ 101.6      $ 93.5      $ 401.8      $ 395.2      $ 410.6      $ 399.3      $ 343.2   

Adjusted EBITDA(4)

     277.5        290.8        1,180.8        1,223.1        1,200.7        1,082.5        954.2   

Adjusted EBITDA Margin(5)

     41.4     42.9     42.3     44.4     43.2     42.1     42.8

Purchase of Property, Plant and Equipment(6)

   $ 188.7      $ 129.6      $ 632.3      $ 485.4      $ 345.7      $ 376.3      $ 265.4   

Purchase of Intangible Assets

     6.5        7.9        10.2        57.4        13.3        27.2        15.8   

Operating Free Cash Flow(7)

     88.8        161.2        548.5        737.7        855.0        706.2        688.8   

Operating Free Cash Flow as a percentage of revenue

     13.3     23.8     19.6     26.8     30.8     27.5     30.8

Adjusted Operating Free Cash Flow(8)

   $ 187.8      $ 207.7      $ 814.1      $ 804.1      $ 905.4      $ 739.7      $ 699.0   

Adjusted Operating Free Cash flow as a percentage of revenue

     28.0     30.6     29.1     29.2     32.6     28.8     31.3

Total Mobile subscribers (in thousands)(9)

     13,637        13,337        13,595        13,466        12,894        12,825        10,055   

ARPU(9)

   $ 14.3      $ 15.3      $ 15.3      $ 16.0      $ 16.2      $ 17.5      $ 17.4   

Consolidated Balance Sheet Data (at period end):

              

Cash and cash equivalents(3)

   $ 312.5        $ 499.8      $ 655.5      $ 1,081.5      $ 656.6      $ 613.3   

Other Current Assets(10)

     609.7          589.6        515.9        755.0        608.9        547.1   

Property, Plant and Equipment and Intangibles, Net

     3,580.5          3,431.4        3,187.9        3,111.9        3,194.5        2,725.0   

Net Current Assets/(Liabilities)

     19.4          212.7        (723.8     685.9        359.8        99.4   

Total Assets

     4,628.7          4,641.4        4,440.5        5,034.7        4,651.9        4,219.3   

Total Debt(11)

     6,539.0          6,498.7        6,084.8        5,924.7        4,918.3        4,564.1   

Share Capital(12)

     307.8          307.8        307.8        307.8        307.8        307.8   

Total Deficit

     (2,950.9       (2,857.8     (2,532.2     (1,754.2     (1,148.3     (1,153.6

 

(1) Includes interest expense, financing costs (including redemption premiums) and losses on foreign exchange movements on the translation of loans.
(2) See note 12 to our audited consolidated financial statements, which are included in this prospectus, for a description of the method used to calculate basic and diluted net loss per share applicable to common shareholders.
(3) Excludes restricted cash of $17.7 million, $13.2 million, $290.3 million, $13.0 million and $18.4 million at March 31, 2015, March 31, 2014, March 31, 2013, March 31, 2012 and March 31, 2011, respectively, and $11.3 million at June 30, 2015. These amounts are included in Other Current Assets.
(4) See “Summary—Summary Consolidated Financial and Operational Information” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net profit/(loss). We define Adjusted EBITDA for any period to be the sum of our consolidated net (loss)/profit, finance costs, net, share of losses of associates, impairments of investment in and loan to associates and other investments, taxation expense, compensation expenses relating to and costs of the voluntary separation program, foreign exchange (gain)/loss, share options and employee profit sharing schemes, (gain)/loss on disposal of assets, impairment of property, plant and equipment, impairment of intangibles, insurance proceeds and depreciation and amortization. We believe that these adjustments represent income or expenses which either do not have any cash impact on the business, are non-recurring in nature or do not relate to the underlying operations of the business. We believe that Adjusted EBITDA provides meaningful additional information to investors since it is commonly reported and widely accepted by analysts and investors as a basis for comparing a company’s underlying profitability with other companies in its industry. This is particularly the case in a capital intensive industry such as wireless telecommunications. Adjusted EBITDA is used by the Board of Directors and management as a measure of profitability. However, Adjusted EBITDA is not an IFRS measure. You should not construe Adjusted EBITDA as an alternative to operating profit or loss or cash flow from operating activities determined in accordance with IFRS, as issued by the IASB. Adjusted EBITDA is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same.

 

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The following table is a reconciliation of our net profit/(loss) to Adjusted EBITDA, operating free cash flow and adjusted operating free cash flow:

 

     Three Month
Period Ended

June 30,
    Year Ended March 31,  
     2015     2014     2015     2014     2013     2012     2011  
                 (in millions, except percentages)  

Net (Loss)/Profit

   $ (31.4   $ (52.5   $ (157.6   $ 43.5      $ (198.5   $ 47.2      $ 43.2   

Finance Costs, Net

     129.7        183.8        596.6        488.2        562.1        407.5        351.9   

Share of Losses of Associates

     6.5        4.2        21.1        7.8        2.2        23.7        57.8   

Impairment of Loan to Associate and Investments

     15.8        —          58.7        39.0        176.0        —         —    

Taxation

     44.4        49.4        189.0        213.9        212.9        160.7        122.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Profit

     165.0        184.9        707.8        792.4        754.7        639.1        575.7   

Voluntary Separation Program Costs

     —          —          14.4        —         4.5        —         —    

Foreign Exchange Loss

     5.4        6.5        29.4        6.4        13.4        11.0        23.5   

Share Option and Employee Profit Sharing Adjustment

     5.6        6.5        22.9        27.5        14.9        34.1        16.0   

(Gain)/Loss on Disposal of Assets

     (0.1     (0.6     1.0        1.6        2.6        8.1        (7.4

Impairment of Property Plant and Equipment

     —          —          3.5        —         —         —         2.9   

Impairment of Intangibles

     —          —          —         —         —         —         5.3   

Insurance Proceeds(a)

     —          —          —         —         —         (9.1     (5.0

Depreciation and Amortization

     101.6        93.5        401.8        395.2        410.6        399.3        343.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     277.5        290.8        1,180.8        1,223.1        1,200.7        1,082.5        954.2   

Less: Purchase of Property, Plant and Equipment

     (188.7     (129.6     (632.3     (485.4     (345.7     (376.3     (265.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Free Cash Flow

     88.8        161.2        548.5        737.7        855.0        706.2        688.8   

Plus: Certain Excluded Capital Expenditure(2)

     99.0        46.5        265.6        66.4        50.4        33.5        10.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Free Cash Flow

   $ 187.8      $ 207.7      $ 814.1      $ 804.1      $ 905.4      $ 739.7      $ 699.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin(5)

     41.4     42.9     42.3     44.4     43.2     42.1     42.8

 

  a. During the year ended March 31, 2012 we received $14.1 million in insurance proceeds as full and final payment of our claim relating to losses incurred as a consequence of the earthquake in Haiti in January 2010. Of these receipts, $9.1 million related to compensation for losses of assets and have been excluded from Adjusted EBITDA above, as was the case with all previous interim receipts. The remaining $5.0 million related to the recovery of incremental operational expenditure which was expensed in the immediate aftermath of the earthquake. The initial expense incurred and the subsequent recovery through the insurance claim both impacted our Adjusted EBITDA

 

(5) Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of our revenue.
(6) Excludes purchase price paid for acquisitions of businesses and is net of proceeds from the sale of Property, Plant and Equipment of $6.2 million, $9.6 million, $2.1 million, $16.5 million and $17.0 million for the years ended March 31, 2015, March 31, 2014, March 31, 2013, March 31, 2012 and March 31, 2011, respectively, and $0.6 million and $4.6 million for the three month periods ended June 30, 2015 and 2014, respectively. In addition, the purchase of Property, Plant and Equipment for the years ended March 31, 2012 and March 31, 2011 is net of the proceeds of an insurance settlement of $14.1 million and $5.0 million, respectively.

 

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(7) Operating free cash flow is calculated as Adjusted EBITDA less Purchase of Property, Plant and Equipment. Operating free cash flow is a Non-IFRS measure. Cash flow from operating activities is calculated in accordance with IFRS, as issued by IASB. You should not construe operating free cash flow as an alternative to operating profit or loss or cash flow from operating activities determined in accordance with IFRS, as issued by IASB. Operating free cash flow is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same.

See footnote (4) above for a reconciliation of our net profit/(loss) to operating free cash flow and adjusted operating free cash flow. The following table is a reconciliation of our net cash provided by operating activities to operating free cash flow and adjusted operating free cash flow (as defined below):

 

     Three Month
Period Ended June
30,
    Year Ended March 31,  
     2015     2014     2015     2014     2013     2012     2011  
                 (in millions)  

Net Cash Provided by Operating Activities

   $ 68.5      $ 148.3      $ 433.4      $ 448.4      $ 561.1      $ 505.2      $ 431.7   

Interest Received

     (0.2     (11.1     (13.0     (6.7     (2.9     (3.8     (5.3

Interest Paid

     87.1        88.7        446.8        416.7        451.8        391.7        335.8   

Taxation Paid

     78.9        39.3        223.3        226.5        117.8        111.6        120.8   

Change in Operating Assets and Liabilities(a)

     37.8        19.1        46.5        131.8        55.0        61.8        47.7   

Voluntary Separation Program

     —          —          14.4        —          4.5        —          —     

Foreign Exchange Loss

     5.4        6.5        29.4        6.4        13.4        11.0        23.5   

Insurance Proceeds

     —          —          —          —          —          5.0     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 277.5      $ 290.8      $ 1,180.8      $ 1,223.1      $ 1,200.7      $ 1,082.5      $ 954.2   

Less: Purchase of Property, Plant and Equipment

     (188.7     (129.6     (632.3     (485.4     (345.7     (376.3     (265.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Free Cash Flow

     88.8        161.2        548.5        737.7        855.0        706.2        688.8   

Plus: Certain Excluded Capital Expenditure(b)

     99.0        46.5        265.6        66.4        50.4        33.5        10.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Operating Free Cash Flow(8)

   $ 187.8      $ 207.7      $ 814.1      $ 804.1      $ 905.4      $ 739.7      $ 699.0   

 

  (a) The “Change in Operating Assets and Liabilities” represents the movement in working capital assets in each financial period.
  (b) Capital expenditure relating to rollouts of Digicel’s fiber networks to businesses and homes, the upgrade of cable networks acquired, Myanmar and building infrastructure (including its investment in a hotel in Haiti and the development of Digicel’s Jamaican and Haitian headquarters). We exclude these expenditures because we view them as investments not related to our core business (Myanmar and building infrastructure) or because they reflect significant expansions for our current business rather than a reflection of ongoing capital expenditures directly related to the ongoing operation of the business.

 

(8)

Adjusted operating free cash flow is calculated as operating free cash flow excluding capital expenditure relating to rollouts of Digicel’s fiber networks to businesses and homes, the upgrade of acquired cable networks, Myanmar and building infrastructure, including its investment in a hotel in Haiti and the development of Digicel’s Jamaican and Haitian headquarters. Such excluded capital expenditures were in aggregate $265.6 million, $66.4 million, $50.4 million, $33.5 million and $10.2 million for the years ended March 31, 2015, March 31, 2014, March 31, 2013, March 31, 2012 and March 31, 2011 respectively. Such excluded capital expenditures were in aggregate $99.0 million and $46.5 million, for the three months ended June 30, 2015 and June 30, 2014, respectively. However, adjusted operating free cash flow is not an IFRS measure. You should not construe adjusted operating free cash flow as an alternative to operating profit or loss or cash flow from operating activities determined in accordance with IFRS, as issued by IASB. Adjusted operating free cash flow is not defined in the same manner by all companies and may not be

 

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  comparable to other similarly titled measures of other companies unless the definition is the same. See footnote (7) for a reconciliation of our net cash provided by operating activities to adjusted operating free cash flow and footnote (4) for a reconciliation of our net profit/(loss) to operating free cash flow and adjusted operating free cash flow.
(9) Mobile subscribers is defined as customers who have made or received a chargeable event in the last 30 days, and ARPU is defined as monthly average revenue per mobile subscriber. ARPU is calculated by dividing mobile service revenue and Business Solutions revenue for the month by the average mobile subscribers during that period. ARPU is different in each of Digicel’s markets and the mix of its subscribers in such markets will impact ARPU. For further discussion of our method of measurement of subscribers and ARPU, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Key Operating Measures—Mobile Key Performance Indicators—Mobile Subscribers”.
(10) Following the termination of the sale of the El Salvador business, our statements of comprehensive income including our audited consolidated financial statements for the years ended March 31, 2012 and 2011 were restated to include the results of the El Salvador operations as part of continuing operations. However, in accordance with IFRS 5, the related assets and liabilities of the El Salvador operations are disclosed as assets and liabilities held for sale in our consolidated balance sheets as of March 31, 2012 and 2011. Assets held for resale of $123.5 million and $140.6 million are included above in Other Current Assets as of March 31, 2012 and 2011, respectively.
(11) Total Debt is gross debt before deferred financing fees and accrued interest. It includes shareholder loans from minority shareholders to our subsidiaries. See “Description of Our Indebtedness”.
(12) Includes share premium and contributed capital.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the rest of this prospectus, including the information set forth in the sections entitled “Business” and “Selected Consolidated Financial and Operational Information”. Prospective investors should read the entire document and not just rely on the discussion and analysis below.

The following discussion contains forward-looking statements based on assumptions and estimates and is subject to risks and uncertainties. Digicel’s future results could differ materially from those discussed below. See “Forward-Looking Statements” for a discussion of the risks and uncertainties related to those statements.

Overview

We are a leading provider of communications services in the Caribbean and South Pacific regions. We provide a comprehensive range of mobile communications, Business Solutions, Cable TV & Broadband and other related products and services to retail, corporate (including small and medium-sized enterprises) and government customers.

Digicel currently provides mobile communications services to 13.6 million subscribers in 31 markets with an aggregate population of approximately 32 million people. We offer HSPA+ or long-term evolution (“LTE”) mobile technology (which we refer to as “4G”) in 30 markets and we hold the number one mobile market position in 21 markets, with a mobile subscriber market share of more than 50% in 20 markets, as determined by internal Company data. Digicel launched mobile services in Jamaica, our first market, in 2001 and became the market leader there within 15 months of launch, based on a strategy that Digicel has since replicated successfully across many of its markets. Our mobile subscriber base has grown from 0.4 million as of March 31, 2002 to 13.6 million subscribers as of June 30, 2015, representing a compound annual growth rate, or CAGR, of 31.7%.

We have leveraged our market-leading positions, brand, people, networks and distribution channels to expand our service offering to include the provision of Business Solutions to corporate and government customers in the 31 markets in which we provide mobile communications services. More recently, we have expanded our service offering to provide Cable TV & Broadband services to residential customers in nine markets, and are in the process of rolling out FTTH networks in Jamaica, Trinidad and Tobago and Barbados. In addition, we are developing a range of innovative new products and services to further broaden our communications and entertainment platform and develop additional revenue streams. These products and services include advanced data and content services such as social media packages, music streaming, video streaming and our proprietary mobile applications.

In the year ended March 31, 2015, Digicel generated total revenue of $2.8 billion, an operating profit of $707.8 million, a net loss of $157.6 million and Adjusted EBITDA of $1.2 billion, representing an operating profit margin of 25.3% and an Adjusted EBITDA margin of 42.3%. For the three months ended June 30, 2015, Digicel generated total revenue of $669.7 million, an operating profit of $165.0 million, a net loss of $31.4 million and an Adjusted EBITDA of $277.5 million, representing an operating profit margin of 24.6% and an Adjusted EBITDA margin of 41.4%. On an IFRS basis as presented in our consolidated financial statements, our cash flow from operating activities was $433.4 million in 2015 and $448.4 million in 2014. As a percentage of revenue, our cash flow from operating activities was 15.5% for the year ended March 31, 2015 compared to 16.3% for the year ended March 31, 2014. For the three months ended June 30, 2015, and 2014, respectively, our cash flow from operating activities was $68.5 million and $148.3 million. As a percentage of revenues, our cash flow from operating activities was 10.2% compared to 21.9% for the three months ended June 30, 2015 and June 30, 2014, respectively. Digicel’s operating free cash flow, calculated as a non-IFRS measure, was $548.5 million for the year ended March 31, 2015 and $737.7 million for the year ended March 31, 2014, which as a percentage of revenue was 19.6% for the year ended March 31, 2015 and 26.8% for the year ended March 31,

 

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2014. For the three months ended June 30, 2015, and 2014, respectively, Digicel’s operating free cash flow was $88.8 million and $161.2 million, which as a percentage of revenue was 13.3% for the three months ended June 30, 2015 and 23.8% for three months ended June 30, 2014. Digicel calculates “operating free cash flow” as Adjusted EBITDA less expenditure on property, plant and equipment. When adjusted to exclude capital expenditure relating to relating to rollouts of its fiber networks to businesses and homes, the upgrade of acquired cable networks, Myanmar and building infrastructure, including its investment in a hotel in Haiti and the development of Digicel’s Jamaican and Haitian headquarters, Digicel’s adjusted operating free cash flow was $814.1 million for the year ended March 31, 2015, and $804.1 million for the year ended March 31, 2014, and as a percentage of revenue was 29.1% and 29.2% for the years ended March 31, 2015 and 2014, respectively. For the three months ended June 30, 2015, and 2014, respectively, Digicel’s adjusted operating free cash flow was $187.8 million and $207.7 million, and as a percentage of revenue was 28.0% and 30.6% for the three months ended June 30, 2015 and 2014, respectively.

Adjusted EBITDA, operating free cash flow and adjusted operating free cash flow are not measures of financial performance under IFRS, as issued by the IASB, and, accordingly, they have not been audited or reviewed by our auditors. Undue reliance should not be placed on the non-IFRS financial measures contained in this prospectus and they should not be considered as a substitute for operating profit, profit for the year, cash flow or other financial measures computed in accordance with IFRS, as issued by the IASB. See “Presentation of Financial and Other Information” for a discussion regarding the use of Adjusted EBITDA, operating free cash flow and adjusted operating free cash flow as non-IFRS financial measures and “Summary—Summary Consolidated Financial and Operational Information” for a reconciliation to the most directly comparable IFRS financial measures.

Recent Developments

Acquisitions

Sky Pacific (Fiji). On September 18, 2015, Digicel entered into a Business Purchase Agreement with Fiji Television Limited to acquire the assets related to the “Sky Pacific” business including the customer contracts, brand and related trademarks. Sky Pacific is a satellite-delivered, direct-to-home pay TV service based in Fiji and covering 13 island countries in the South Pacific including, American Samoa, Cook Islands, Fiji, Kiribati (East), Nauru, New Caledonia, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu. Sky Pacific currently has 23,000 RGU’s. The transaction is expected to close by the end of September 2015. Digicel believes this acquisition will add to the entertainment options available to its customers in its South Pacific markets and enable Digicel to grow this business as part of its evolution into a total communications and entertainment provider in all of its markets.

AllcomMCR (Papua New Guinea). On July 29, 2015, Digicel acquired the entire share capital of Allcom, which is a leading ICT business in Papua New Guinea. The acquisition of Allcom, which generated revenues of approximately $3.1 million for the five month period ended May 30, 2015, complements Digicel’s Business Solutions offering in Papua New Guinea.

Uniqa (Suriname). On June 30, 2015, Digicel signed an agreement to acquire 100% of the shares of United Telecommunication Services Suriname N.V., which owns 99.993% of International Telecommunication Suriname N.V., a mobile operator in Suriname which trades under the “Uniqa” brand and holds the number three mobile market position. Digicel intends to integrate Uniqa’s mobile customer base into its existing operations in Suriname. Uniqa generated revenues of approximately $4.4 million for the year ended December 31, 2013, the most recent year for which audited financial statements are available and has mobile subscribers of approximately 5,000 as of the date of this prospectus. As of the date of this prospectus, the Uniqa transaction has not been completed and is not consolidated in Digicel’s financial statements for the same period.

BTC (Bermuda). On June 1, 2015, Digicel completed the acquisition of 100% of BTC. BTC is currently the leading fixed telephony provider in Bermuda and also provides cable broadband services. BTC’s core network is

 

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fiber, with DSL lines available to approximately 100% of the households in Bermuda. BTC generated revenues of $45 million for the year ended March 31, 2014, the most recent year for which audited financial statements are available. Digicel believes the quality of the assets it has purchased will allow it to overlay fiber into households in the future to provide a platform for offering high-speed broadband and Cable TV services to subscribers in Bermuda.

Myanmar Tower Company

Digicel and YSH Finance Ltd (comprising Yoma Strategic Holdings Ltd and First Myanmar Investment Co., Ltd) are shareholders in Digicel Asian Holdings PTE Limited (“DAHPL”), holding 75% and 25%, respectively. On December 2, 2013, Digicel announced that DAHPL had signed an agreement with Ooredoo Myanmar to develop, construct and lease telecommunications towers in the Republic of the Union of Myanmar. Based in Qatar and formerly known as the Qtel Group, Ooredoo obtained a mobile license in the Republic of the Union of Myanmar in 2014. Myanmar Tower Company Limited, a subsidiary company established in the Republic of the Union of Myanmar for this project, owns 1,250 cell phone towers, all subject to a long-term lease agreement with Ooredoo.

On October 2, 2015, Digicel entered into a Share Purchase Agreement with DAH with respect to the sale of its 75% shareholding. Closing of the Myanmar Sale is currently expected to occur by November 30, 2015, and the closing is conditioned upon customary closing conditions, including the approval of the government of the Republic and Union of Myanmar (including the Posts and Telecommunications Department thereof) and Bank Negara Malaysia and the consent of YSH Finance Limited, the minority shareholder in DAH. The purchase price is $165,750,000, with cash proceeds to Digicel (after customary cash, working capital, capital expenditure and debt adjustments) expected to be approximately $125.0 million, with net proceeds of approximately $120.0 million to Digicel after additional transaction costs. The sale is expected to result in a gain on disposal of approximately $60.0 million. MTC generated approximately $5.9 million revenue and net profit of $0.4 million for the quarter ended June 30, 2015.

Voluntary Separation Program

In March 2015, Digicel announced a Voluntary Separation Program aimed at reducing staff numbers as part of its ongoing efforts to streamline operations and realign its resources to reflect its focus on evolving to a total communications and entertainment provider. Digicel recognized $14.4 million in separation costs in the year ended March 31, 2015.

Key Factors Affecting Digicel’s Business

Digicel’s operations and the key operating measures discussed below have been, and may continue to be, affected by certain key factors as well as certain historical events and actions. The key factors affecting Digicel’s business and the results of operations include, in particular, Digicel’s evolution into a total communications and entertainment provider and its expansion into on-island and subsea fiber, acquisitions, the introduction of new products and services, regulation, fluctuations in exchange rates, competition, the level of mobile penetration and pricing. Each of these factors is discussed in more detail below.

Evolution into a Total Communications and Entertainment Provider

Digicel is in the process of evolving from a pure mobile telecommunications company into a leading total communications and entertainment provider while remaining focused on improving its competitive position in each of its markets by providing customers with access to better mobile technology, more innovative products, a superior customer experience and better value compared to Digicel’s competitors. This evolution includes the expansion of its product offerings through developing its Business Solutions services and entering Cable TV & Broadband businesses, which have lower penetration rates than the Mobile business in Digicel’s markets. See “Business”. As described further below, as part of this strategy, Digicel has completed a number of acquisitions of Cable TV & Broadband and content businesses. Digicel is also implementing plans for the greenfield launch

 

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of new businesses in these sectors. Digicel intends to tailor its strategy to the potential and characteristics of each market and customer segment, and to continue to employ strict levels of financial discipline and control.

Expansion into On-Island and Subsea Fiber

In order to drive the delivery of Cable TV & Broadband and Business Solutions, as well as improve Digicel’s offerings for mobile data services, Digicel has invested significantly in on-island fiber networks and off-island subsea fiber bandwidth. Digicel has built FTTB networks in certain areas of Jamaica, Trinidad and Tobago, Haiti, Barbados and Papua New Guinea and will continue to extend those networks where the commercial opportunity meets our investment criteria. Digicel is also in the process of rolling out FTTH networks in Jamaica, Trinidad and Tobago and Barbados. Furthermore, as described below, Digicel completed the acquisition of assets from Global Caribbean Fibre in September 2014 which provided it with a wholly-owned subsea fiber optic cable network with capacity from Trinidad and Tobago, connecting 12 countries to Puerto Rico with onward connectivity to the rest of the United States. These investments will enable Digicel to offer high-speed Cable TV & Broadband services and improve Digicel’s Business Solutions offering to corporate and government customers who have high-quality of service requirements and utilize products that require increased bandwidth. In the year ended March 31, 2015, Digicel incurred capital expenditures of $30.9 million related to its rollout of FTTB networks and $118.3 million in relation to the rollout of its FTTH networks and upgrading the networks of a number of acquired businesses as it selectively deploys its capital in areas which it believes represent attractive opportunities to generate strong returns over time. For the three months ended June 30, 2015, Digicel incurred capital expenditures of $9.5 million related to the rollout of FTTB networks and $73.9 million in relation to the rollout of its FTTH networks and upgrading the networks of a number of acquired businesses. As of May 28, 2015, our FTTH networks comprised approximately 2,632 kilometers of fiber passing approximately 257,031 homes.

Acquisitions

Digicel has a disciplined approach to acquisitions and evaluates opportunities to pursue its growth strategies both organically and through targeted acquisitions. Digicel has extensive experience in selecting, acquiring and integrating a wide range of telecommunications assets. In the past, Digicel has been able to generate benefits to its business from acquisitions. For example, in certain markets where Digicel has acquired an incumbent operator as a means to enter a market, it has significantly improved the performance of the acquired business. In the French West Indies, Digicel completed the acquisition of Bouygues Telecom in April 2006. Prior to Digicel’s acquisition, Bouygues Telecom generated revenue of approximately $124 million and Adjusted EBITDA of approximately $24 million for the year ended December 31, 2005. Digicel completed its acquisition of Bouygues Telecom Caraibe in April 2006 and it generated revenue of $198.4 million and Adjusted EBITDA of $76.5 million in the year ended March 31, 2015. In other markets, where Digicel has launched greenfield businesses and subsequently completed bolt-on acquisitions in those markets, Digicel has successfully integrated the acquired businesses into its existing operations and improved their market position. For instance, Digicel completed the acquisition of Cingular’s Caribbean operations in 2005 and 2006 and Digicel integrated the acquired businesses in St. Lucia, St. Vincent and the Grenadines, Grenada and Barbados into its existing operations. Digicel currently holds the number one position in these markets. More recently, Digicel has completed the acquisition of a number of cable broadband, cable TV and content businesses to take advantage of the structural convergence of mobile and fixed services and to seek to realize network, technology and operational synergies by integrating these acquired businesses with its existing mobile operations and re-launching them under the “Digicel” brand. Consistent with our disciplined approach, Digicel has made a number of strategic acquisitions in recent years, including:

Sky Pacific (Fiji)

On September 18, 2015, Digicel entered into a Business Purchase Agreement with Fiji Television Limited to acquire the assets related to the “Sky Pacific” business including the customer contracts, brand and related trademarks. Sky Pacific is a satellite-delivered, direct-to-home pay TV service based in Fiji and covering 13 island countries in the South Pacific including, American Samoa, Cook Islands, Fiji, Kiribati (East), Nauru, New

 

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Caledonia, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu. Sky Pacific currently has 23,000 RGU’s. The transaction is expected to close by the end of September 2015. Digicel believes this acquisition will add to the entertainment options available to its customers in its South Pacific markets and enable Digicel to grow this business as part of its evolution into a total communications and entertainment provider in all of its markets.

AllcomMCR (Papua New Guinea)

On July 29, 2015, Digicel acquired Allcom, which is a leading ICT business in Papua New Guinea.

Uniqa (Suriname)

On June 30, 2015, Digicel signed an agreement to acquire a mobile operator in Suriname which trades under the “Uniqa” brand and holds the number three in the Suriname mobile market position. As of the date of this prospectus, the Uniqa transaction has not been completed and is not consolidated in Digicel’s financial statements for the same period.

BTC (Bermuda)

On January 9, 2015, Digicel executed a combination agreement with respect to the acquisition of BHL, which owns 100% of the share capital of BTC, and completed the acquisition of 100% of BTC on June 1, 2015.

Hitron and Channel 8 (Papua New Guinea)

In October and November 2014, Digicel acquired Channel 8 Limited and Hitron Limited, which are Cable TV operators in Papua New Guinea.

Telstar (Jamaica)

In September 2014, Digicel completed the purchase of Telstar Cable Limited in Jamaica having received the required approvals from the Broadcasting Commission. TCL is a provider of cable TV, broadband and fixed telephony services in Jamaica. This business has not yet been rebranded as “Digicel Play” and we are currently investing in migrating our hybrid fiber-coaxial network to a FTTH Gigabit Passive Optical Network, which, when complete, will allow us to offer an advanced suite of product and services including high-speed broadband, digital fixed line voice and Cable TV (with features such as Video on Demand, multiscreen viewing and Personal Video Recorder, or “PVR”), under the “Digicel Play” brand.

SportsMax (Caribbean-wide content)

In September 2014, Digicel acquired International Media Content Ltd., the parent company of regional sports broadcaster, SportsMax, and North American broadcaster CEEN-TV. Currently available in 26 countries across the Caribbean, SportsMax is the Caribbean’s first and only indigenous 24-hour dedicated sports cable channel featuring a strong mix of international, regional and local sports content including: the Barclays Premier League, UEFA Champions League, West Indies cricket, the Indian Premier League and the IAAF Grand Prix.

TCI Broadcasting (Turks and Caicos)

In April 2014, Digicel acquired TCI Broadcasting Limited, which has been providing Cable TV services in the Turks and Caicos for over 30 years, and its sister company TCT Limited, which operates the TCExpress High Speed Cable Internet Service in Turks and Caicos. Digicel rebranded these operations as “Digicel Play” in April 2015. Digicel upgraded the HFC network to the Data Over Cable Service Interface Specification 3.0, an international telecommunications standard (“DOCSIS 3.0”), enabling Digicel to begin offering higher Internet speeds than were currently available in the market. The TV service was also upgraded to digital to provide a better subscriber experience.

 

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SAT Telecommunications (Dominica)

In February 2014, Digicel acquired SAT Telecommunications Ltd. in Dominica. SAT Telecommunications Ltd. provides a range of TV, telephony and broadband Internet services to residential and business customers. In October 2014, Digicel re-launched this business in Dominica as “Digicel Play.” Digicel upgraded the HFC network to the DOCSIS 3.0 standard, enabling Digicel to begin offering higher Internet speeds than are currently available in the market. The TV service was also upgraded to digital to offer a best-in-class TV experience with an advanced electronic program guide using the Minerva platform.

Global Caribbean Fibre (Eastern Caribbean region)

In December 2013, Digicel entered into a share and asset purchase agreement with Global Caribbean Fibre SAS to acquire certain subsea fiber assets in the Eastern Caribbean region. This acquisition was completed on September 11, 2014 and provides Digicel with a wholly-owned subsea fiber optic cable network with capacity from Trinidad and Tobago, connecting 12 countries to Puerto Rico with onwards connectivity to the rest of the United States. In total, Digicel secured access to a network comprising 15 subsea segments with a reach of approximately 3,100 km across the Caribbean region.

Digicel’s consolidated financial statements reflect the results of the acquired entities from their date of acquisition (Digicel does not consolidate DHCAL results, treating it as an equity method investment in accordance with IFRS, as issued by the IASB). Accordingly, results for prior periods may not be representative of Digicel’s future results.

Introduction of New Products and Services

Digicel continues to be innovative with respect to the development of new products and services for its mobile subscribers as it looks to develop its revenue streams from areas other than traditional voice and short messaging services. This has included the development of more advanced data and content services such as social media packages, music streaming, video streaming and Digicel’s proprietary applications including “Digicel Space” (a personal cloud storage solution for smartphones) and “Loop” (the most downloaded news app in Digicel’s markets). In addition, Digicel continually evaluates opportunities to generate revenue from areas such as mobile financial services, mobile advertising, the monetization of “big data” and e-commerce and it expects innovation to be a key driver of growth. For example, Trend Media, Digicel’s in-house digital and mobile media agency, has recently invested in analytical software that provides greater granularity for targeting subscribers for advertisements based on location and interest of subscribers. For additional information on Digicel’s mobile advertising business and Trend Media, see “Business—Products and Services—Mobile Advertising”. The revenue generated by Digicel from mobile advertising is currently not material. However, Digicel believes that there is an opportunity to grow advertising revenue and its sales teams in each market evaluate opportunities in this area. Furthermore, as part of Digicel’s evolution to a total communications and entertainment provider, it is focused on developing and selling additional products and services through which it can gain a greater share of its subscribers’ disposable income such as Cable TV & Broadband. Digicel is also leveraging its networks, brand, people, networks and distribution channels to expand the range of Business Solutions products and services it offers to corporate and government customers.

Regulation

Digicel’s Mobile and Cable TV & Broadband operations are subject to regulation in each of the markets in which Digicel operates. The regulatory regimes in these markets are less developed than in other markets such as the United States and European Union countries, and can therefore change quickly. In particular, regulators in each of the markets where Digicel operates have reduced, or are considering reducing, interconnection rates. Digicel cannot predict which countries will in fact reduce interconnection rates or the amount by which they will be reduced. In Digicel’s largest markets (including Jamaica, Haiti, Papua New Guinea, French West Indies and El Salvador), interconnection rates have already been reduced significantly in recent years and we do not expect

 

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any material impact from future reductions in mobile termination rates in these markets. However, in Papua New Guinea, the NICTA has recommended to the minister responsible for telecommunications the continued regulation of domestic interconnection services and the extension of that regulation to the termination of international incoming calls. Such regulation could create a significant adverse impact on revenue and operating profits for Digicel’s operations in Papua New Guinea. See “Business—Legal Proceedings”. In addition, Digicel also has a mobile subscriber market share of more than 50% in 20 of its market and, as a result, a high proportion of “on-net” traffic which mitigates the impact of reductions in mobile termination rates. Mobile termination revenue represented approximately 12% of its total revenue in the year ended March 31, 2015 and approximately 11% of its total revenue for the three months ended June 30, 2015. See “Regulation”.

Fluctuation in Exchange Rates

Exchange rates for currencies of many of the countries in which Digicel operates fluctuate in relation to the U.S. dollar and such fluctuations may have a material adverse effect on Digicel’s earnings, assets or cash flows when translating local currency into Digicel’s U.S. dollar reporting currency. For each operation which reports its results in a currency other than the U.S. dollar, a decrease in the value of that currency against the U.S. dollar reduces Digicel’s profits as well as its assets and liabilities. To the extent that Digicel’s operations retain earnings or distribute dividends in local currencies, the amount of U.S. dollars it receives is affected by exchange rate fluctuations of those currencies against the U.S. dollar. In addition, exchange rates impact Digicel’s earnings and cash flows due to U.S. dollar-denominated debt held at the local operational level where local currency borrowing facilities are either not available or cannot be obtained under commercially acceptable terms. Digicel generally does not hedge its foreign currency exposure since there are few available instruments in the countries where it operates.

Competition

Digicel currently holds the number one mobile market position in 21 of the 31 markets in which it provides mobile telecommunications services. In addition, Digicel is continuing to grow its revenue from Business Solutions and Cable TV & Broadband and believes that it is well positioned to become a leading provider of such services in the markets in which it provides those services. Digicel’s mobile subscribers and Cable TV & Broadband revenue generating units (“RGUs”) are impacted by, among other things, the level of the competition we experience in each market. Operators typically compete on the basis of price, services offered, advertising and brand image, quality and reliability of service and coverage area. Any material change in the nature of the competition we face in our markets, as well as any decline in the level of general economic activity in our markets or the disposable income of our customers, could adversely impact our ability to increase or maintain our revenue, cash flow from operating activities or liquidity.

Level of Mobile Penetration

In the markets in which we operate, the liberalization of the telecommunications industry combined with the unsatisfied demand for basic telephone services has facilitated the rapid growth in mobile telecommunications and we believe that we have been a key driver of the level of mobile penetration in those markets by introducing innovative products and services and investing in networks with wide population coverage. This has resulted in relatively high mobile penetration rates in many of our markets currently, which we believe are bolstered by the prevalence of multiple SIM ownership in certain markets (which can result in a substantial differential between unique subscribers and SIM connections in many markets). Despite the relatively high penetration rates in many of our markets, we have continued to grow our mobile subscriber base and we believe there is the potential for further growth as customer penetration rates still lag behind developed markets. The level of mobile penetration in each market is one of the factors that Digicel considers as part of growth strategy and capital expenditure plans and, in general, there is greater scope to add more mobile subscribers in markets with relatively low mobile penetration rates (such as Papua new Guinea and Haiti).

 

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Pricing

Digicel’s pricing varies across the products and services that it offers and it adjusts its pricing policies based on evolving market practices as well as its overall business strategy. Those policies are impacted by both competition and regulation. For example, price competition is significant for voice services, which represented 60.0% of Digicel’s revenue in the year ended March 31, 2015 and 56.2% of its total revenue for the three months ended June 30, 2015. Voice services are largely commoditized with limited ability to differentiate these services among operators. On the other hand, by providing innovative data, content and other services, such as mobile financial services and mobile advertising, Digicel can distinguish its offering from its competitors. Furthermore, as we continue to expand our Cable TV & Broadband product offering, our ability to offer multiple-product packages as bundles could potentially provide us with a competitive price advantage. The price of a multiple-product subscription package generally depends on the content and options available on each platform, market conditions and pricing by competitors with similar offerings. Other services that Digicel provides, such as Business Solutions, require more customization and contracts and prices are negotiated with each customer.

Key Operating Measures

Digicel uses several key performance measures to track the performance of its business. None of these measures are a measure of financial performance under IFRS, as issued by the IASB. As these terms are defined by Digicel’s management, they may not be comparable to similar terms used by other companies. See “Presentation of Financial and Other Information—Non-IFRS financial measures”.

Mobile Key Performance Indicators

The following is a summary of the key performance indicators for Digicel’s Mobile business, from which Digicel generated $2,439.0 million (or 87.3% of its total revenue) in the year ended March 31, 2015 and $571.4 million (or 85.3% of its total revenue) for the three months ended June 30, 2015.

 

     Key Performance Indicators  
     Three Month Period
Ended June 30,
     Year Ended March 31,  
     2015      2014      2015      2014      2013  

Mobile subscribers (in millions):

              

Papua New Guinea

     2.5         2.3         2.5         2.3         2.2   

Haiti

     4.7         4.4         4.6         4.5         4.3   

Jamaica

     2.2         2.2         2.2         2.2         2.1   

Trinidad and Tobago

     0.9         0.9         0.9         0.9         0.8   

French West Indies

     0.5         0.5         0.5         0.5         0.5   

El Salvador

     1.0         1.1         1.1         1.2         1.2   

Guyana

     0.4         0.3         0.4         0.3         0.3   

Eastern Caribbean

     0.3         0.3         0.3         0.3         0.3   

Other Markets

     1.1         1.3         1.1         1.3         1.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13.6         13.3         13.6         13.5         12.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Pre-paid % of mobile subscribers (%)

     93.6      94.1      93.7      94.3      94.5

Smartphone Penetration (%)

     34.8      23.3      33.1      21.0      14.4

ARPU (US$)

     14.3         15.3         15.3         16.0         16.2   

Mobile SAC per unit (US$)

     37.2         33.8         29.6         30.8         31.0   

Monthly Mobile Churn (%)

     4.2      4.8      5.0      4.3      4.2

SAC as a percentage of Mobile revenues (%)

     5.3      4.9      5.3      5.3      5.4

 

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Mobile Subscribers

Digicel defines a mobile subscriber as a customer who has made or received a chargeable event in the last 30 days. Digicel believes that this is a conservative measurement policy compared to other mobile operators which often use 90 days or 60 days as their measurement criterion. For the purposes of this prospectus, all subscriber numbers have been presented in accordance with Digicel’s 30-day definition.

Digicel’s mobile subscriber base grew from 12.9 million as of March 31, 2013 to 13.6 million as of March 31, 2015 and remains at 13.6 million as of June 30, 2015 (of which 93.6% were prepaid subscribers as of June 30, 2015). Digicel believes there is scope for further growth, particularly in markets such as Papua New Guinea and Haiti, where mobile penetration rates are relatively low.

Smartphone Penetration

Smartphone penetration is defined as the percentage of Digicel’s mobile subscriber base that use a smartphone and it has increased from approximately 14.4% of its subscriber base on March 31, 2013 to 34.8% on June 30, 2015, which has enabled growth in its VAS revenue and Digicel expects it will continue to do so. The penetration level is growing as a result of Digicel’s significant investment in 4G networks, consumer demand for mobile access to Internet browsing, video content and social media and the availability of entry level smartphones at prices of less than $50. Digicel expects the level of smartphone penetration to continue to grow and drive increases in its revenue from the provision of data/VAS services.

ARPU

In Digicel’s Mobile business, the principal drivers of Digicel’s revenue are the number of subscribers and ARPU. ARPU is defined as monthly average revenue per mobile subscriber. ARPU is calculated by dividing mobile service revenue and Business Solutions revenue for the month by the average mobile subscribers during that period. ARPU is different in each of Digicel’s markets and the mix of its subscribers in such markets will impact ARPU. In addition, on a consolidated basis, our overall ARPU represents an average across all of our mobile operations and is therefore impacted by the mix of ARPU generated by each market. For example, higher income levels in markets such as the French West Indies are reflected in higher ARPU levels than in markets such as Papua New Guinea or Haiti. Where we increase mobile subscribers in markets with lower income and therefore lower ARPU this would reduce the overall ARPU per subscriber for Digicel as a whole. ARPU, which we report in U.S. dollars, is also impacted by local currency fluctuations.

Digicel’s ARPU decreased from $16.2 in the twelve months ended March 31, 2013 to $15.3 in the twelve months ended June 30, 2015, primarily due to subscriber growth in Haiti (which generate lower ARPU than other markets) and to the devaluation of local currencies, Digicel’s ARPU decreased from $15.3 for the three months ended June 30, 2014 to $14.3 for the three months ended June 30, 2015 primarily due to subscriber growth in Haiti and Papua New Guinea (which generate lower ARPU than other markets) and to the devaluation of local currencies. There is a growing use of data/VAS and Digicel’s revenue from data/VAS has increased from 23.0% of mobile service revenue in the year ended March 31, 2013 to 31.2% in the year ended March 31, 2015 and 33.9% in the three months ended June 30, 2015. This has partially offset reductions in voice revenues, which are largely due to competitive pressures and by reductions in mobile termination rates.

Mobile SAC

Subscriber acquisition costs primarily represent dealer commissions, SIM cards, fulfillment costs, subsidies on handsets and costs relating to inventory.

Subscriber acquisition costs, or SAC, are costs associated with acquiring a new mobile subscriber or retaining an existing subscriber and the level of Digicel’s costs is influenced by, among other things, the cost of

 

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handsets and the level of handset subsidy provided by Digicel to its customers. To reduce subscriber acquisition costs and churn, Digicel has reduced handset subsidies and places emphasis instead on a customer loyalty scheme, including a point system under which subscribers earn points based on services used which can be applied to the purchase of new handsets or airtime. Digicel’s SAC per unit, excluding SIM only sales, has been broadly stable over the previous three fiscal years, declining marginally from $31.0 in the year ended March 31, 2013 to $29.6 in the year ended March 31, 2015 and it increased from $33.8 for the three months ended June 30, 2014 to $37.2 for the three months June 30, 2015 as a result of lower handset distributions in Haiti and Papua New Guinea (where the average handset cost is lower than Digicel’s average) in the three months ended June 30, 2015. Subscriber acquisition costs represented 5.3% of mobile revenue in the years ended March 31, 2015 and 2014, 5.4% of mobile revenue in the year ended March 31, 2013, 5.3% in the three months ended June 30, 2015 and 4.9% in the three months June 30, 2014.

Monthly Churn

Digicel calculates churn rates by dividing the opening subscribers plus activations during the period less closing subscribers, by the average number of subscribers. Churn has increased in Haiti and El Salvador as a result of larger volumes of SIM only sales, which have been a characteristic of these markets. SIM only sales relate to customers acquiring a new subscriber account with Digicel without obtaining a subsidized handset. Certain promotions may be available to customers with a new account, which has resulted in higher rotation of SIM cards by customers as they avail themselves of multiple promotions. However, given there is no handset subsidy in SIM only sales, the subscriber acquisition cost associated with those sales are minimal. Digicel’s average churn rate per month for the year ended March 31, 2015 was 5.0% and 4.2% for the three months ended June 30, 2015. Excluding Haiti and El Salvador, Digicel’s average churn rate per month for the year ended March 31, 2015 was 3.7% and 2.7% for the three months ended June 30, 2015. Measurement of churn is also distorted by existing customers who buy new handsets with SIM cards to upgrade their handsets (transferring their old SIM card with their old phone number into the new handset without actually ever using the newly purchased SIM card).

Business Solutions

Digicel’s Business Solutions revenue is derived principally from the provision of technology solutions to corporate (including small and medium-sized enterprises) and government customers. Digicel tailors its service offerings to the specific needs of each customer and then enters into contracts with customers (typically with a duration of one to three years) and it often re-sells equipment at low margins to allow it to up-sell further services and generate higher margin and recurring revenue from those clients. Since the rollout of its Business Solutions offerings, Digicel believes that it has expanded the target market by offering high-quality services that were previously unavailable or unaffordable within its markets. Digicel sees further opportunities to materially increase its revenue from Business Solutions and it has a strong focus on building its sales pipeline for this business.

Cable TV & Broadband

Digicel’s Cable TV & Broadband business is in the nascent stages of development after the completion of a number of recent acquisitions. Digicel is investing in its networks and is in the process of rolling out FTTH networks in certain markets. As of June 30, 2015, Digicel had 112,000 Cable TV & Broadband RGUs and it aims to grow this business by leveraging its brand, customer knowledge, distribution channels and network infrastructure to become one of the leading players in the markets in which it provides these services.

 

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Key Income Statement Line Items

Revenue

Digicel generates revenue mainly from fees associated with the communication, data, content and related services it provides to its customers, such as airtime and data usage fees, roaming fees, connection fees, monthly subscription fees, cable broadband, fixed-line telephone, data transmission, cable TV, sale of content, ICT services and equipment sales and mobile financial services.

Digicel will seek to increase its Mobile revenue through the growth of subscribers in Digicel’s existing markets and through the introduction of value-added products and services aimed at different customer needs.

As of June 30, 2015, Digicel earned revenue in 19 different currencies with the Jamaican dollar, the Haitian gourde and the Papua New Guinea kina being the most prominent currencies, accounting for approximately 12%, 13% and 17%, respectively, of Digicel’s total revenue for the three months ended June 30, 2015 and 13%, 13% and 17%, respectively, of Digicel’s total revenue for the year ended March 31, 2015. Digicel reports its revenue in U.S. dollars. For the quarter ended June 30, 2015, approximately 48.9% of Digicel’s revenue was in U.S. dollars or in currencies pegged to the U.S. dollar or currencies with managed exchange rates against the U.S. dollar while 51.1% was not in any of those currencies, including approximately 6% of revenue denominated in euro.

The principal drivers of Digicel’s revenue from mobile services are the number of subscribers and ARPU. ARPU is different in each of Digicel’s markets and the mix of its subscribers within each market will impact ARPU. In addition, on a consolidated basis, our overall ARPU represents an average across all of our mobile operations and is therefore impacted by the mix of ARPU generated by each market.

For Business Solutions services, Digicel sells equipment to its clients at low margins to establish a relationship with them and focuses on generating revenue through the provision of recurring contracted services.

Our Cable TV & Broadband revenue is derived primarily from recurring subscription revenue for Cable TV & Broadband services.

Direct operating and subscriber acquisition costs

The largest components of Digicel’s direct operating and subscriber acquisition costs are interconnection costs, costs of the sale of prepaid top-up (including commissions and card production costs), the cost of equipment sales and subscriber acquisition costs, which, for the year ended March 31, 2015 amounted to approximately 23.3%, 20.8%, 19.1% and 17.1%, respectively, of Digicel’s direct operating and subscriber acquisition costs. For the three months ended June 30, 2015, interconnection costs, costs of the sale of prepaid top-up (including commissions and card production costs), the cost of equipment sales and subscriber acquisition costs, amounted to approximately 23.9%, 20.9%, 11.2% and 17.4%, respectively, of Digicel’s direct operating and subscriber acquisition costs.

The cost of equipment sales primarily represents the cost of mobile handsets and information technology hardware acquired by Digicel and sold to customers as part of its Mobile and Business Solutions businesses. Subscriber acquisition costs primarily represent commissions, SIM cards, fulfillment costs, subsidies on mobile handsets and costs relating to inventory. Subscriber acquisition costs are expensed when incurred. Digicel’s direct operating and subscriber acquisition costs also includes direct cost associated with its Cable TV & Broadband business and these costs represented 2.1% of the total direct operating and subscriber acquisition costs for the year ended March 31, 2015. For the three months ended June 30, 2015, these costs represented 10.1% of the total direct operating and subscriber acquisition costs.

 

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Other Operating Expenses

Other operating expenses include site operating costs, operating lease rentals, network support, software and IT costs, advertising and promotion, professional fees, travel, facilities costs and other miscellaneous operating expenses.

Staff Costs

Staff costs primarily comprise salaries, statutory contributions, equity compensation charge under IFRS 2 and Voluntary Separation / Reorganization costs.

Depreciation, amortization and impairment of property, plant and equipment and intangible assets

Depreciation, amortization and impairment of property, plant and equipment and intangible assets relates to the depreciation of property, plant and equipment to write down the cost of each asset to its residual value over its estimated useful life, the amortization of intangible assets over their useful lives, and the impairment of goodwill, intangible assets and property, plant and equipment as required.

We will continue to seek ways to control our overall cost base as we add new subscribers in order to improve our operating margins. Digicel will seek to achieve this by utilizing economies of scale and employing its centralized information, human resources, best practices and technology systems to serve its expanding customer base and by centralizing negotiations for commercial contracts for the business.

Finance Income

Finance income relates to interest received on cash deposits.

Finance Costs

Finance costs include interest expense and other financing related costs such as redemption premiums, the amortization of deferred financing fees, the extinguishment of deferred fees upon early redemption and foreign exchange gains and losses on loans.

Digicel expects that the use of proceeds from this offering and the related reduction in its indebtedness will contribute to a lower interest expenses in future years. As described further in “Use of Proceeds”, Digicel has not yet determined which specific tranches of debt it will repay but it expects a reduction in its annual interest expense in future periods by approximately $61.5 million (assuming Digicel prepays debt with the lowest prepayment premiums and based on current interest rates, as some debt bears variable rate interest) to $82.0 million (assuming Digicel avails itself of the Equity Claw-back provisions provided under the indentures governing its senior notes and prepays a portion of its senior credit facilities and based on current interest rates, as some debt bears variable rate interest). The actual annual interest saving will ultimately depend on the specific debt that is repaid or retired and the mechanism by which such debt is repaid or retired.

Taxation

Taxation on the profit for the year comprises current and deferred taxes. Current tax is the expected tax payable on the taxable income for the year and any adjustments to tax payable in respect of prior years. Deferred tax is provided in full, using the liability method, on temporary differences arising between the taxes bases of assets and liabilities and their carrying amounts in the financial statements.

Although DGL is exempt from taxes in Bermuda until 2035, all of its operating entities are subject to taxes at the prevailing income tax rates in the jurisdictions in which they operate. In a small number of the markets in

 

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which Digicel operates, the corporate income tax rate is zero and the corporate income tax rates in all other jurisdictions, including Digicel’s five largest markets in terms of revenue, ranges from 17% up to 45%. Tax losses which may arise in one jurisdiction cannot be used to offset the taxable profits earned in another jurisdiction and the interest expense on our debt cannot be offset against the taxable profits of operating subsidiaries. For the year ended March 31, 2015, Digicel’s effective tax rate was 28.6% and the effective tax rates for Jamaica, Haiti, Papua New Guinea, Trinidad and Tobago and the French West Indies were 35.7%, 30.5%, 29.3%, 24.7% and 38.7%, respectively. These effective tax rates are calculated by dividing the tax charge in the income statement for the year ended March 31, 2015, as adjusted for any under or over provisions in respect of prior years and the tax impact of any unrealized foreign exchange losses on certain inter-company loans not deductible for tax purposes, by the profit before tax in taxable jurisdictions for that year.

Critical Accounting Policies

Digicel’s consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB. In compiling these statements, management needs to make assumptions, estimates and judgments, which are often subjective and may be affected by changing circumstances or changes in its analysis. Material changes in these assumptions, estimates and judgments have the potential to materially alter the results of Digicel’s operations. Digicel has identified below, those of its accounting policies that Digicel believes could potentially produce materially different results if it were to change its underlying assumptions, estimates and judgments. For a detailed discussion of these and other accounting policies, see note 2 to Digicel’s consolidated financial statements, which are included in this prospectus.

Property, Plant and Equipment. Property, plant and equipment is stated at historical cost less accumulated depreciation. Depreciation is calculated on a straight-line basis to write down the cost of each asset to its residual value over its estimate useful life. In respect of Digicel’s Cable TV & Broadband business, the cost of the first installation of equipment at a customer’s premises (including all direct materials, equipment, labor and associated costs) is capitalized and amortized over a period of three years. Any subsequent installation to those premises is categorized as an expense. All set-top boxes installed by Digicel remain the property of Digicel and the cost of this equipment is capitalized by Digicel and depreciated over a three-year period from the date of installation.

Impairment of Non-Financial Assets. Digicel records significant intangible and tangible assets relating to Digicel’s operations. Intangible assets mainly relate to licenses and goodwill, and tangible assets to property, plant and equipment of the network. Significant estimates, assumptions and judgments are required to determine the expected useful lives of these assets. During each reporting period Digicel assesses whether there is an indication that an asset may be impaired. These assessments can be significantly affected by changes in competition, technology and other similar factors. If any such indication exists, or at least annually for goodwill, Digicel makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s fair value less cost to sell and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the cash flows are discounted to their present value using a discount rate, such as the weighted average cost of capital that reflects current market assessment of the time value of money and the risks specific to the asset. The recoverable amounts of cash generating units have been determined based on value in use calculations. These calculations require the use of estimates, including discount rates, management’s expectations of future revenue growth, customer acquisition and retention costs, churn rates, capital expenditure and market share for each cash generating unit. The estimates can have a material impact on the amount of any goodwill impairment

Revenue Recognition. Digicel’s Mobile revenue comprises amounts charged to customers in respect of monthly access charges, airtime usage, messaging and the provision of other mobile telecommunication services including data services, and interconnect revenue arising from agreements entered into with other networks.

 

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Access charges and airtime used by contract customers are invoiced and recorded as part of a periodic billing cycle and recorded as revenue over the related access period, with unbilled revenue resulting from services already provided from the billing cycle date to the end of each period accrued. Revenue from the sale of prepaid credit is deferred until such time as the customer uses the airtime or the credit expires. Revenue from data services is recognized when the related service has been delivered to the customer. Revenue arising from interconnect and roaming agreements with other networks is recognized gross, with amounts due to other networks recognized as direct operating and subscriber acquisition costs. Digicel’s Mobile revenue also includes amounts charged to customers for the sale of handsets and accessories for a limited number of its subsidiaries that do not use the services of a distributor but manage the sale of handsets to its customers directly. Digicel’s subscription revenue in recognized in the month of service delivery and Digicel’s transactional revenue is recognized in the month of service delivery or billable event. Revenue arrangements with multiple deliverables (“bundled offers” such as equipment and services sold together) are divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. The arrangement consideration is then allocated among the separate units of accounting based on their relative fair values or on the residual method. Revenue is then recognized separately for each unit of accounting.

Subscriber Acquisition Cost. Digicel charges to the profit and loss account every month a cost comprising the subsidy on each handset sold to each dealer inclusive of all transportation and duty cost, a fulfillment fee from Digicel’s distributor correlating to the number of handsets sold in the month, and the cost of SIM cards as they are activated. The subsidy and fulfillment fees are direct charges from Digicel’s distributors. In addition Digicel provides for the subsidy on handsets fulfilled but not yet invoiced to Digicel as well as 50% of any commercial gain or loss on unfulfilled handsets in the distributor’s warehouse.

Equity compensation. Digicel has recognized share-based compensation expenses of $20.5 million, $22.5 million and $11.8 million in the fiscal years ended March 31, 2015, 2014 and 2013, respectively, and share-based compensation expenses of $5.1 million and $5.9 million for the three months ended June 30, 2015 and 2014, respectively. In determining the fair value of the options Digicel uses the Black-Scholes valuation model. This requires complex and judgmental assumptions including price, employee exercise patterns (expected life of the options), estimated volatility and future forfeitures. The computation of expected volatility is based on an average historical volatility from common shares of a group of Digicel’s peers. The expected life of options granted is based on a simplified calculation of expected life as Digicel does not have sufficient exercise history. Forfeitures rates are derived from historical employee termination behavior. If any of the assumptions used change significantly, share-based compensation expense may differ materially. In determining the fair value of Digicel’s share capital, Digicel used a combination of the income approach and the market approach to estimate Digicel’s total enterprise value. Digicel estimates the fair value of the share capital using this estimated enterprise value in the context of Digicel’s capital structure. The estimated fair value of the share capital is then used to determine the fair value of options issued. The income and market approaches require significant management judgment and assumptions around projected cash flows, rate of return, valuation multiples and other relevant inputs.

Impairment of loan to an associate. The impairment of the loan to an associate is determined using valuation techniques, including a discounted cash flow analysis and an equity discount analysis. Management uses its judgment to select a variety of methods and makes assumptions that are based mainly on market conditions existing at the end of each reporting period, such as discount rates, EBITDA multiples, projected cash flows and other relevant inputs.

Fair values of acquired tangible and intangible assets. Accounting for property, plant and equipment, and intangible assets involves the use of estimates for determining the fair value at the acquisition date, particularly in the case of such assets acquired in a business combination. Furthermore, the expected useful lives of these assets must be estimated. The annual depreciation and amortization charge is sensitive to the estimated useful lives allocated to each type of asset. Asset lives are assessed annually and changed when necessary based on factors such as technological change, network investment plans, expected level of usage and physical conditions of the assets concerned.

 

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Interconnect income and payments to other telecommunications operators. In certain instances, Digicel relies on other operators to measure the traffic flows interconnecting with its networks. Estimates are used in these cases to determine the amount of income receivable from, or payments Digicel needs to make to, these other operators. The prices at which these services are charged are often regulated and estimates are used in assessing the likely effect of these adjustments.

Income taxes. Digicel is subject to income taxes in various jurisdictions. Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. For these items, Digicel believes its estimates, assumptions and judgments are reasonable but this can involve complex issues which may take a number of years to resolve. The final determination of tax liabilities could be different from the estimates reflected in the financial statements and may result in the recognition of an additional tax expense or tax credit.

Deferred tax assets and liabilities require management judgment in determining the amounts to be recognized. In particular, judgment is used when assessing the extent to which deferred tax assets should be recognized with consideration given to the timing and level of future taxable income.

Litigation. Digicel exercises considerable judgment in recognizing and measuring provisions and the exposure to contingent liabilities related to pending litigation. Judgment is necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and to quantify the possible range of final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provisions.

Distributor Arrangements. In most of the markets in which Digicel operates, handsets are purchased from the manufacturer and sold to dealers by distributors acting as principals.

Digicel has considered the key terms of the agreements with the distributors in the context of the indicators below to determine that the distributors are acting as principals when they sell handsets to the authorized dealer network.

The distributors have primary responsibility for providing the handsets to dealers and fulfilling orders. Any product issues encountered by dealers are remedied either directly with the distributors or manufacturers, through the distributors. The distributors assume the risk of physical loss or damage before or after the dealer order, during shipping and on return. Digicel pays subsidies and fees to the distributors, but the majority of general inventory risk of losses arising from lost, damaged and stolen inventory rests with the distributors. The distributors bear all of the credit risk for the amount payable by the dealers and Digicel does not compensate or subsidize any part of the credit risk. Based on this, Digicel determined that the distributors are acting as principals in respect of the procurement and distribution of handsets and not as agents of Digicel. Therefore, Digicel does not recognize revenue on the sales of products by the distributor.

Use of Constant Exchange Rate (“CER”)

Digicel analyzes revenue in currencies other than the U.S. dollar, which is the Company’s reporting currency, on a CER basis, so that revenue growth can be considered excluding movements in foreign exchange rates. See “—Exchange rate risk”. Revenue on a CER basis is a non-IFRS financial measure, computed by converting revenue in local currency for the relevant period using the prior period’s average foreign exchange rates and comparing to the prior period’s revenue. ARPU, which we report in U.S. dollars, is also impacted by local currency fluctuations.

 

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Results of Operations

Comparison of Three Month Period Ended June 30, 2015 and 2014

The following table sets forth certain income statement items for the periods indicated:

 

     Three Month Period
Ended June 30,
    Impact on Comparative Results
for Period
 
     2015     2014     Amount of
Variation
    Percentage
Change (%)
 
     (in millions, except percentages)  

Consolidated Income Statement Data:

        

Revenue

   $ 669.7      $ 678.6      $ (8.9     (1.3

Direct operating and subscriber acquisition costs

     (174.4     (183.1     8.7        (4.8

Other operating expenses

     (149.3     (142.6     (6.7     4.7   

Staff Costs

     (79.4     (74.5     (4.9     6.6   

Depreciation, amortization and impairment of property, plant and equipment and intangible assets

     (101.6     (93.5     (8.1     8.7   
  

 

 

   

 

 

   

 

 

   

Operating Profit

     165.0        184.9        (19.9     (10.8

Finance Income

     0.2        0.8        (0.6     (75.0

Finance Costs(1)

     (129.9     (184.6     54.7        (29.6

Share of Loss of Associate

     (6.5     (4.2     (2.3     54.8   

Impairment of Loan to Associate

     (15.8     —          (15.8     —     
  

 

 

   

 

 

   

 

 

   

Profit before Taxation

     13.0        (3.1     16.1        (519.4

Taxation

     (44.4     (49.4     5.0        (10.1
  

 

 

   

 

 

   

 

 

   

Net (Loss)/Profit

   $ (31.4   $ (52.5   $ 21.1        (40.2
  

 

 

   

 

 

   

 

 

   

 

(1) Includes interest expense, financing costs (including redemption premiums) and losses on foreign exchange movements on the revaluation of loans.

Subscribers. Digicel’s total mobile subscribers increased by approximately 2.3% to 13.6 million as of June 30, 2015 from 13.3 million as of June 30, 2014. Net additions of subscribers for the three months ended June 30, 2015 were 0.3 million, largely as a result of subscriber growth in Haiti and Papua New Guinea, compared with a 0.1 million net reduction for three months ended June 30, 2014.

Revenue. Revenue decreased by $8.9 million, or 1.3%, to $669.7 million for the three months ended June 30, 2015 from $678.6 million for the three months ended June 30, 2014. On a CER basis, revenue increased 3.7% for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014. Further details of Digicel’s revenue by geographic segment and by product and service are outlined below.

 

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Revenue by Geographic Segment

The table below sets forth Digicel’s revenue by geographical location for the periods indicated.

 

     Three Month Period
Ended June 30,
     Actual Change     Change on a CER Basis  
     2015      2014      Amount of
Variation
    Percentage
Change (%)
    Amount of
Variation
    Percentage
Change (%)
 
     (in millions, except percentages)  

Revenue by Geographic Market(1):

              

Papua New Guinea

   $ 112.7       $ 121.2       $ (8.5     (7.0   $ 4.5        3.7   

Haiti

     113.8         118.7         (4.9     (4.1     0.8        0.7   

Jamaica

     98.6         101.3         (2.7     (2.7     1.0        1.0   

Trinidad and Tobago

     65.5         65.1         0.4        0.6        (0.5     (0.8

French West Indies

     42.7         51.9         (9.2     (17.7     0.8        1.5   

El Salvador

     22.8         28.6         (5.8     (20.3     (5.8     (20.3

Guyana

     23.5         23.1         0.4        1.7        0.4        1.7   

Eastern Caribbean(2)

     18.3         20.7         (2.4     (11.6     (2.4     (11.6

Other locations/Unallocated(3)

     171.8         148.0         23.8        16.1        26.4        17.9   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

   $ 669.7       $ 678.6       $ (8.9     (1.3   $ 25.2        3.7   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The revenue shown above is presented before the elimination of intercompany revenues and recharges between the markets.
(2) St. Lucia, Grenada and St. Vincent and the Grenadines.
(3) “Other locations” include Anguilla, Antigua and Barbuda, Aruba, Barbados, Bermuda, Bonaire, the British Virgin Islands, the Cayman Islands, Curaçao, Dominica, Fiji, St. Kitts and Nevis, Nauru, Samoa, Suriname, TCI, Tonga, and Vanuatu, for all periods presented. Unallocated represents revenues arising from miscellaneous other sources, including revenue from the Caribbean Premier League (“CPL”), the Myanmar Tower business, digital media and mobile advertising, subsea fiber optic cable network, Digicel’s hotel in Haiti and other items, and the elimination of inter-segment revenues.

In Papua New Guinea, revenue decreased by $8.5 million, or 7.0%, to $112.7 million for the three months ended June 30, 2015 from $121.2 million for the three months ended June 30, 2014 as Digicel’s reported revenue in Papua New Guinea was impacted by an adverse movement in the average exchange rate from local currency into the U.S. dollar of 10.6% from the three month period ended June 30, 2014 to the three month period ended June 30, 2015. On a CER basis, revenue increased 3.7% for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014. For the three months ended June 30, 2015, data/VAS revenue and Business Solutions revenue increased relative to the three months ended June 30, 2014, while equipment revenues decreased over the same period as a result of a more targeted approach to direct handset sales and lower churn/upgrade. Digicel’s subscriber base in Papua New Guinea increased 7.9% from June 30, 2014 to June 30, 2015 as the Company began to capitalize on its network expansion (300 additional sites).

In Haiti, revenue decreased by $4.9 million, or 4.1%, to $113.8 million for the three months ended June 30, 2015 from $118.7 million for the three months ended June 30, 2014 as Digicel’s reported revenue in Haiti was impacted by an adverse movement in the average exchange rate from local currency into the U.S. dollar of 6.1% from the three month period ended June 30, 2014 to the three month period ended June 30, 2015. Digicel’s subscriber base in Haiti increased 4.7% from June 30, 2014 to June 30, 2015. On a CER basis, revenue increased 0.7% for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014 as data/VAS revenue and business solution revenue increases were moderated by lower international incoming voice revenue and lower equipment sales.

In Jamaica, revenue decreased by $2.7 million, or 2.7%, to $98.6 million for the three months ended June 30, 2015 from $101.3 million for the three months ended June 30, 2014. This decrease was primarily due to

 

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a 4.4% adverse movement in the local currency against the U.S. dollar. In April 2015, Digicel introduced a new pricing package in the Jamaican market, Digicel Zero. Digicel Zero offers prepaid customers free Facebook, Instagram, Twitter, WhatsApp and free Digicel to Digicel on-net calls when subscribers purchase a three-day data package. As a result of this package, data/VAS revenue increased in the three months ended June 30, 2015 relative to the three months ended June 30, 2014. On a CER basis the increase in data/VAS, business solutions and equipment revenue in Jamaica outstripped the decrease in voice revenue. As such, on a CER basis, revenue increased 1.0% for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014.

In Trinidad and Tobago, revenue increased by $0.4 million, or 0.6%, to $65.5 million for the three months ended June 30, 2015 from $65.1 million for the three months ended June 30, 2014. Revenue from mobile data/VAS and Business Solutions has continued to grow and offset a decline in mobile voice revenue over the same period.

In the French West Indies, revenue decreased by $9.2 million, or 17.7%, to $42.7 million for the three months ended June 30, 2015 from $51.9 million for the three months ended June 30, 2014. This decrease was primarily due to a 19.4% adverse movement in the local currency against the U.S. dollar. On a CER basis, revenue increased 1.5% for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014 due to increased data/VAS revenues and equipment revenues.

In El Salvador, revenue decreased by $5.8 million, or 20.3%, to $22.8 million for the three months ended June 30, 2015 from $28.6 million for the three months ended June 30, 2014. This decrease was primarily due to reductions in mobile termination rates and aggressive competitive activity in the market. Digicel completed the upgrade of its mobile network in El Salvador in August 2015, which involved the addition of 115 new sites to its network and a significant expansion of its 4G network to 441 sites, which Digicel believes provides a platform to compete more effectively.

In Guyana, revenue increased by $0.4 million, or 1.7%, to $23.5 million for the three months ended June 30, 2015 from $23.1 million for the three months ended June 30, 2014. The increase was driven by a 3.9% increase in Digicel’s mobile subscribers in the year ended March 31, 2015 and growth in revenue from mobile data/VAS.

In the Eastern Caribbean, revenue decreased by $2.4 million, or 11.6%, to $18.3 million for the three months ended June 30, 2015 from $20.7 million for the three months ended June 30, 2014. This decrease was primarily due to a 1.7% decrease in Digicel’s mobile subscribers from June 30, 2014 to June 30, 2015 which contributed to lower mobile revenue.

In Other locations, revenue increased by $23.8 million, or 16.1%, to $171.8 million for the three months ended June 30, 2015 from $148.0 million for the three months ended June 30, 2014. This increase was primarily due to the impact of acquisitions from the current and preceding financial year and contributions from the Myanmar Tower business and the CPL.

 

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Revenue by Product Line

The table below sets forth Digicel’s revenue by product line for the periods indicated. See “Business” for a further description of these product lines.

 

     Three Month Period
Ended June 30,
     Impact on Comparative Results
for Period
 
     2015      2014      Amount of
Variation
     Percentage
Change (%)
 
     (in millions, except percentages)  

Revenue by Product Line:

           

Mobile

           

Data/VAS

   $ 193.9       $ 186.0       $ 7.9         4.2   

Voice

     376.7         421.7         (45.0      (10.7
  

 

 

    

 

 

    

 

 

    

Total Mobile

     570.6         607.7         (37.1      (6.1

Business Solutions

     33.9         25.9         8.0         30.9   

Cable TV & Broadband

     15.4         3.9         11.5         294.9   

Other Revenue

     23.7         7.3         16.4         224.7   
  

 

 

    

 

 

    

 

 

    

Service Revenue

     643.6         644.8         (1.2      (0.2

Handset/Equipment Revenue

     26.1         33.8         (7.7      (22.8
  

 

 

    

 

 

    

 

 

    

Total Revenue

   $ 669.7       $ 678.6       $ (8.9      (1.3
  

 

 

    

 

 

    

 

 

    

Mobile revenue decreased by $37.1 million, or 6.1%, to $570.6 million for the three months ended June 30, 2015 from $607.7 million for the three months ended June 30, 2014. Revenue from data and VAS increased by $7.9 million, or 4.2%, for the three months ended June 30, 2015 as smartphone penetration and the demand for data services continued to increase. Revenue from voice services, which includes transit and inbound roaming revenue, decreased by $45.0 million, or 10.7%, for the three months ended June 30, 2015. The majority of this decrease was attributable to the French West Indies, Papua New Guinea, Jamaica, Haiti and El Salvador where, other than in El Salvador, revenue was impacted by the adverse movement of local currencies against the U.S. dollar for the three months ended June 30, 2015 and, in the French West Indies and El Salvador, by reductions in mobile termination rates. In addition, the industry wide trend of a substitution of data for voice was also prevalent in Digicel’s markets.

Business Solutions revenue, which is generated from services provided to Digicel’s corporate and governmental customers, increased by $8.0 million, or 30.9%, to $33.9 million for the three months ended June 30, 2015 from $25.9 million for the three months ended June 30, 2014. This increase was primarily due to Digicel’s continued focus on expanding its offering and customer base in this product line, which includes having dedicated sales teams for these services with a strong focus on its sales pipeline. The increase in Business Solutions revenue for the three ended June 30, 2015 was experienced in numerous markets. Digicel’s revenue from the sale of equipment to Business Solutions customers, which is often at low or negligible margin, is included separately as part of its Handset/Equipment Revenue.

Cable TV & Broadband revenue increased by $11.5 million, or 294.9%, to $15.4 million for the three months ended June 30, 2015 from $3.9 million for the three months ended June 30, 2014. This increase was primarily due to a 34% increase in RGUs in Digicel’s existing Cable TV & Broadband businesses and acquisitions completed since June 30, 2014. For example, Digicel completed the acquisitions of Telstar (September 2014), SportsMax (September 2014), Hitron (November 2014) and BTC (June 2015). The FTTH businesses in Jamaica, Trinidad and Tobago and Barbados did not contribute to Cable TV & Broadband revenue for the three months ended June 30, 2015, but Digicel expects that they will in future periods.

Other revenue was from miscellaneous other sources, including revenue from CPL, the Myanmar Tower business, digital media and mobile advertising, subsea fiber optic cable network, Digicel’s hotel in Haiti and

 

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other items. Other revenue increased by $16.4 million, or 224.7%, to $23.7 million for the three months ended June 30, 2015 from $7.3 million for the three months ended June 30, 2014. Other revenue increased as certain of these businesses either were not owned by Digicel, such as the subsea fiber optic cable network, or did not generate revenue, such as the Myanmar Tower business and the hotel in Haiti owned by Turgeau Development S.A., in the three months ended June 30, 2014.

Handset/Equipment revenue included (i) amounts charged to customers for the sale of handsets and accessories for a limited number of its subsidiaries that do not use the services of a distributor but manage the sale of handsets to its customers directly, and, as noted above, (ii) revenue generated from the sale of equipment to the Business Solutions customers. Handset/Equipment revenue decreased by $7.7 million, or 22.8%, to $26.1 million for the three months ended June 30, 2015 from $33.8 million for the three months ended June 30, 2014 primarily due to lower handset sales in El Salvador and Papua New Guinea. The reduction in handset revenue in both markets was driven by a more targeted approach to direct handset sales by Digicel and also by lower churn/upgrade. The decrease in handset sales is also reflected in the decrease in the cost of equipment sales, which decreased by $14.2 million for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014.

ARPU. Digicel’s ARPU per month was $14.3 for the three months ended June 30, 2015, compared to $15.3 for the three months ended June 30, 2014. The reduction was primarily due to the adverse currency fluctuations in Jamaica, the French West Indies, Haiti and El Salvador as outlined above and continued subscriber growth in markets with lower ARPU such as Haiti and Papua New Guinea.

Direct operating and subscriber acquisition costs. Direct operating and subscriber acquisition costs decreased by $8.7 million, or 4.8%, to $174.4 million for the three months ended June 30, 2015 from $183.1 million for the three months ended June 30, 2014.

The cost of equipment sales decreased by $14.2 million, or 42.1%, to $19.5 million for the three months ended June 30, 2015 as compared to $33.7 million for the three months ended June 30, 2014, as a result of reduced equipment sales. The cost of equipment sales includes the cost of equipment purchased by Digicel for sale as part of its Business Solutions business and the cost of handsets purchased directly by Digicel for sale through its distribution channels to Mobile subscribers. For the three months ended June 30, 2015, there were also decreases in dealer margin costs of $6.2 million (as a result of new retail commission structures introduced by Digicel), USO levies and call taxes of $3.3 million and data and roaming charges of $2.3 million. These decreases were offset by an increase in the direct costs of our Cable TV & Broadband businesses as a result of recent acquisitions and new business start-ups. As a percentage of total revenue, direct costs (excluding subscriber acquisition costs) were 21.5% for the three months ended June 30, 2015 and 22.6% for the three months ended June 30, 2014.

Subscriber acquisition costs increased by $0.6 million, or 2.0%, to $30.3 million for the three months ended June 30, 2015 from $29.7 million for the three months ended June 30, 2014. Subscriber acquisition cost per unit (excluding SIM only sales) amounted to $37.2 for the three months ended June 30, 2015, compared to $33.8 in the year ended March 31, 2014 as a result of lower handset distributions in Haiti and Papua New Guinea in the three months ended June 30, 2015. Subscriber acquisition costs represented 5.3% of mobile revenue for the three months ended June 30, 2015 and 4.9% for the three months ended June 30, 2014.

Other operating expenses. Other operating expenses are comprised of the network operating costs (consisting of site operating costs, operating lease rentals, network support and software and IT costs) and expenses such as advertising and promotion, professional fees, travel, facilities costs and other expenses. Other operating expenses increased by $6.7 million, or 4.7%, to $149.3 million for the three months ended June 30, 2015 from $142.6 million for the three months ended June 30, 2015. The increase was largely due to increases in network operating costs and professional fees which were offset by reductions in advertising and promotion and certain other costs. The network operating cost increased by $4.1 million, or 6.5%, to $67.4 million for the three

 

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months ended June 30, 2015 from $63.3 million for the three months ended June 30, 2014 primarily due to the expansion of our mobile networks in Papua New Guinea, Haiti and Jamaica, the Myanmar tower business and acquisitions. Professional fees increased by $4.6 million, or 55.4%, to $12.9 million for the three months ended June 30, 2015 from $8.3 million for the three months ended June 30, 2014. Advertising and promotion expenses decreased by $3.3 million, or 11.3%, to $26.0 million for the three months ended June 30, 2015 from $29.3 million for the three months ended June 30, 2014.

Staff costs. Staff costs increased by $4.9 million, or 6.6%, to $79.4 million for the three months ended June 30, 2015 from $74.5 million for the three months ended June 30, 2014. Excluding share option and employee profit share costs, which decreased by $0.9 million, underlying staff costs increased by $5.8 million arising primarily from costs associated with our newly acquired businesses and our new business startups.

Depreciation, amortization and impairment of property, plant and equipment and intangible assets. Depreciation, amortization and impairment of property, plant and equipment and intangible assets increased by $8.1 million, or 8.7%, to $101.6 million for the three months ended June 30, 2015 from $93.5 million for the three months ended June 30, 2014. The increase arises from higher depreciation and amortization charges and there were no impairment charges for the three months ended June 30, 2015.

Operating profit. Operating profit for the three months ended June 30, 2015 was $165.0 million, compared to an operating profit of $184.9 million for the three months ended June 30, 2014, a decrease of $19.9 million. The increased contributions to operating profit from Haiti, Jamaica, Guyana and Papua New Guinea of $2.3 million, $0.8 million, $0.8 million and $0.4 million, respectively, were offset by a reduction in the contribution to operating profit from Trinidad and Tobago, French West Indies, El Salvador, the Eastern Caribbean and Other locations which decreased by $1.4 million, $1.5 million, $2.6 million, $1.0 million and $18.2 million, respectively. The reduction in the operating profit from Other locations includes $4.6 million of losses associated with start-up losses related to Digicel Play in Papua New Guinea during the quarter-ended June 30, 2015 and $3.9 million of losses associated with CPL with the balance primarily relating to the other operations in the South Pacific (excluding Papua New Guinea) and holding company costs.

Finance income. Finance income relates to interest received on cash deposits. Finance income decreased by $0.6 million to $0.2 million for the three months ended June 30, 2015, due to lower cash balances.

Finance costs. Finance costs include interest expense and other financing costs. Finance costs decreased by $54.7 million, or 29.6%, to $129.9 million for the three months ended June 30, 2015 from $184.6 million for the three months ended June 30, 2014 mainly as a result of no redemption premiums or deferred financing fees expensed on the redemption of debt being recognized for the three months ended June 30, 2015 compared to $59.9 million being recognized for the three months ended June 30, 2014. The interest expense decreased by $0.7 million from $112.3 million for the three months ended June 30, 2014 to $111.6 million for the three months ended June 30, 2015. Financing costs also include foreign exchange losses on loans of $11.9 million during the three months ended June 30, 2015, compared to a loss of $4.6 million for the three months ended June 30, 2014. Other finance costs decreased by $0.3 million to $1.6 million for the three months ended June 30, 2015 from $1.9 million for the three months ended March 31, 2014. Digicel expects that the use of proceeds from this offering and the related reduction in its indebtedness will contribute to lower interest expenses in future years.

Share of losses of associate. As of June 30, 2015, Digicel had a 43.59% equity interest in DHCAL (44.98% on a fully diluted basis). The investment has been accounted for as an associated entity using the equity method. Based on Digicel’s proportional interest in DHCAL, Digicel recorded losses of $5.6 million for the three months ended June 30, 2015, compared to $3.4 million for the three months ended June 30, 2014 against the carrying amount of its loan to DHCAL. Losses from other associates amounting to $1.0 million in the quarter ended June 30, 2015 relate to Digicel’s share of losses in Boom Financial, Inc. (previously trading as M-Via, Inc.), Aggrego Services LLC and Mobilecover Holdings Pte. Limited.

 

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Impairment of loans to, and equity investment in, associates. As of June 30, 2015, an impairment review was conducted in relation to the investments in DHCAL and Boom Financial, Inc. (previously trading as M-Via, Inc.) as the performance and cash flows of their businesses were lower than previous expectations. Following the review, a provision for impairment of $15.8 million was recognized in the three months ended June 30, 2015. This was split between a provision for impairment of $8.0 million recognized against the carrying value of the loans to DHCAL and a provision for impairment of $7.8 million recognized against the carrying value of loans and equity investment in Boom Financial, Inc. There were no such provisions in the three month period ended June 30, 2014.

Taxation. Taxation decreased by $5.0 million, or 10.1%, to $44.4 million for the three months ended June 30, 2015 from $49.4 million for the three months ended June 30, 2014, due to lower taxable profits in the French West Indies, Jamaica and Haiti.

Net loss. Digicel’s net loss for the three months ended June 30, 2015 was $31.4 million, compared to a net loss of $52.5 million for the three months ended June 30, 2014.

Adjusted EBITDA. Adjusted EBITDA for the three months ended June 30, 2015 was $277.5 million, compared to $290.8 million for the three months ended June 30, 2014, a decrease of $13.3 million, or 4.6%. The contribution of Papua New Guinea, Jamaica and French West Indies to Adjusted EBITDA decreased by $1.6 million, $2.3 million and $4.9 million, respectively, as a result of the adverse currency movements noted above. Haiti’s contribution to Adjusted EBITDA increased by $1.5 million, or 2.8%, despite adverse currency movements in that market. El Salvador’s contribution to Adjusted EBITDA decreased by $3.0 million, or 52.1%, principally as a result of lower termination rates and aggressive competitor activity in that market. Digicel completed the upgrade of its mobile network in El Salvador in August 2015 which involved the addition of 115 new sites to its network and a significant expansion of its 4G network to 441 sites, which Digicel believes provides a platform to compete more effectively. The contributions from all other markets to Adjusted EBITDA decreased by $2.9 million for the three months ended June 30, 2015 largely due to new business initiatives and recently acquired businesses. Digicel’s Adjusted EBITDA margin was 41.4% for the three months ended June 30, 2015, compared to 42.9% for the three months ended June 30, 2014. See “Presentation of Financial and Other Information” for a discussion regarding the use of Adjusted EBITDA as a financial measures and “Summary—Summary Consolidated Financial and Operational Information” for a reconciliation of our net profit/(loss) to Adjusted EBITDA.

Comparison of Years Ended March 31, 2015 and 2014

The following table sets forth certain income statement items for the years indicated:

 

     Year Ended
March 31,
    Impact on Comparative Results
for Period
 
     2015     2014     Amount of
Variation
    Percentage
Change (%)
 
     (in millions, except percentages)  

Consolidated Income Statement Data:

        

Revenue

   $ 2,794.1      $ 2,753.6      $ 40.5        1.5   

Direct operating and subscriber acquisition costs

     (753.9     (743.7     (10.2     1.4   
  

 

 

   

 

 

   

 

 

   

Other operating expenses

     (610.1     (543.6     (66.5     12.2   

Staff Costs

     (317.0     (278.7     (38.3     13.7   

Depreciation, amortization and impairment of property, plant and equipment and intangible assets

     (405.3     (395.2     (10.1     2.6   
  

 

 

   

 

 

   

 

 

   

Operating Profit

     707.8        792.4        (84.6     (10.7

Finance Income

     2.7        16.9        (14.2     (84.0

Finance Costs(1)

     (599.3     (505.1     (94.2     18.6   

Share of Loss of Associate

     (21.1     (7.8     (13.3     170.5   

Impairment of Loan to Associate

     (58.7     (39.0     (19.7     50.5   
  

 

 

   

 

 

   

 

 

   

Profit before Taxation

     31.4        257.4        (226.0     (87.8

Taxation

     (189.0     (213.9     24.9        (11.6
  

 

 

   

 

 

   

 

 

   

Net (Loss)/Profit

   $ (157.6   $ 43.5      $ 201.1        (462.3
  

 

 

   

 

 

   

 

 

   

 

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(1) Includes interest expense, financing costs (including redemption premiums) and losses on foreign exchange movements on the revaluation of loans.

Subscribers. Digicel’s total mobile subscribers increased by approximately 1.0% to 13.6 million as of March 31, 2015 from 13.5 million as of March 31, 2014. Net additions of subscribers for the year ended March 31, 2015 were 0.1 million, compared with 0.6 million net additions for the year ended March 31, 2014. In the year ended March 31, 2015, Digicel completed the construction of 296 new sites in Papua New Guinea to expand its coverage in certain rural areas, which it believes should facilitate future growth in its subscriber base.

Revenue. Revenue increased by $40.5 million, or 1.5%, to $2,794.1 million in the year ended March 31, 2015 from $2,753.6 million in the year ended March 31, 2014. On a CER basis, revenue increased 5.3% in the year ended March 31, 2015 as compared to the year ended March 31, 2014. Further details of Digicel’s revenue by geographic segment and by product and service are outlined below.

Revenue by Geographic Segment

The table below sets forth Digicel’s revenue by geographical location for the periods indicated.

 

     Year Ended
March 31,
     Actual Change     Change on a CER Basis  
     2015      2014      Amount of
Variation
    Percentage
Change (%)
    Amount of
Variation
    Percentage
Change (%)
 
     (in millions, except percentages)  

Revenue by Geographic Market(1):

              

Papua New Guinea

   $ 500.6       $ 500.3       $ 0.3        0.1      $ 40.7        8.1   

Haiti

     478.8         497.9         (19.1     (3.8     (1.6     (0.3

Jamaica

     421.3         434.9         (13.6     (3.1     16.3        3.7   

Trinidad and Tobago

     268.8         260.2         8.6        3.3        10.4        4.0   

French West Indies

     198.4         213.7         (15.3     (7.2     (3.6     (1.7

El Salvador

     106.7         118.6         (11.9     (10.0     (11.9     (10.0

Guyana

     91.2         83.2         8.0        9.6        8.0        9.6   

Eastern Caribbean(2)

     80.7         83.6         (2.9     (3.5     (2.9     (3.5

Other locations/Unallocated(3)

     647.6         561.2         86.4        15.4        90.3        16.1   
  

 

 

    

 

 

    

 

 

     

 

 

   

Total Revenue

   $ 2,794.1       $ 2,753.6       $ 40.5        1.5      $ 145.8        5.3   
  

 

 

    

 

 

    

 

 

     

 

 

   

 

(1) The revenue shown above is presented before the elimination of intercompany revenues and recharges between the markets.
(2) St. Lucia, Grenada and St. Vincent and the Grenadines.
(3) “Other locations” include Anguilla, Antigua and Barbuda, Aruba, Barbados, Bermuda, Bonaire, the British Virgin Islands, the Cayman Islands, Curaçao, Dominica, Fiji, St. Kitts and Nevis, Nauru, Samoa, Suriname, TCI, Tonga, and Vanuatu, for all periods presented. Unallocated represents revenues arising from miscellaneous other sources, including revenue from CPL, the Myanmar Tower business, digital media and mobile advertising, subsea fiber optic cable network, Digicel’s hotel in Haiti and other items, and the elimination of inter-segment revenues.

In Papua New Guinea, revenue increased by $0.3 million, or 0.1%, to $500.6 million in the year ended March 31, 2015 from $500.3 million in the year ended March 31, 2014. On a CER basis, revenue increased by $40.7 million or 8.1% in the year ended March 31, 2015 as compared to the year ended March 31, 2014 as Digicel’s reported revenue in Papua New Guinea was impacted by an adverse movement in the average exchange rate from local currency into the U.S. dollar of 8.0% from the year ended March 31, 2014 to the year ended March 31, 2015.

 

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In Haiti, revenue decreased by $19.1 million, or 3.8%, to $478.8 million in the year ended March 31, 2015 from $497.9 million in the year ended March 31, 2014. This decrease was primarily due to adverse movements in the local currency against the U.S. dollar, which resulted in the average exchange rate from local currency into the U.S. dollar depreciating by 4.7% from the year ended March 31, 2014 to the year ended March 31, 2015. On a CER basis, revenue decreased by 0.3% in the year ended March 31, 2015 as compared to the year ended March 31, 2014, reflecting lower voice revenues offset by higher mobile data and Business Solutions revenues.

In Jamaica, revenue decreased by $13.6 million, or 3.1%, to $421.3 million in the year ended March 31, 2015 from $434.9 million in the year ended March 31, 2014. This decrease was primarily due to a 8.6% adverse movement in the local currency against the U.S. dollar. On a CER basis, revenue increased by 3.7% in the year ended March 31, 2015 as compared to the year ended March 31, 2014, reflecting an increase in subscribers, higher mobile data and Business Solutions revenue and non-recurring revenue from a settlement with a competitor. Since March 31, 2015, Digicel introduced an innovative pricing package in the Jamaican market called “Digicel Zero” which offers prepaid customers free Facebook, Instagram, Twitter, WhatsApp and free on-net calls when subscribers purchase a three-day data package. Digicel believes this offering has been well received in the market.

In Trinidad and Tobago, revenue increased by $8.6 million, or 3.3%, to $268.8 million in the year ended March 31, 2015 from $260.2 million in the year ended March 31, 2014. This increase was primarily due to continued growth in mobile subscribers and growth in revenue from mobile data/VAS and Business Solutions.

In the French West Indies, revenue decreased by $15.3 million, or 7.2%, to $198.4 million in the year ended March 31, 2015 from $213.7 million in the year ended March 31, 2014. This decrease was primarily due to a 5.7% adverse movement in the local currency against the U.S. dollar. On a CER basis, revenue decreased by 1.7% in the year ended March 31, 2015 as compared to the year ended March 31, 2014. A reduction in mobile termination rates in the French West Indies contributed to a reduction in the revenue for the year ended March 31, 2015 when compared to the year ended March 31, 2014.

In El Salvador, revenue decreased by $11.9 million, or 10.0%, to $106.7 million in the year ended March 31, 2015 from $118.6 million in the year ended March 31, 2014. This decrease was primarily due to reductions in mobile termination rates and aggressive competitive activity in the market.

In Guyana, revenue increased by $8.0 million, or 9.6%, to $91.2 million in the year ended March 31, 2015 from $83.2 million in the year ended March 31, 2014. The increase was driven by a 3.9% increase in Digicel’s mobile subscribers in the year ended March 31, 2015, which led to growth in revenue from both voice and data/VAS.

In the Eastern Caribbean, revenue decreased by $2.9 million, or 3.5%, to $80.7 million in the year ended March 31, 2015 from $83.6 million in the year ended March 31, 2014. This decrease was primarily due to a decrease in voice and handset revenues.

In Other locations, revenue increased by $86.4 million, or 15.4%, to $647.6 million in the year ended March 31, 2015 from $561.2 million in the year ended March 31, 2014. This increase was primarily due to the impact of acquisitions from the current and preceding financial year and contributions from the Myanmar Tower business and the CPL.

 

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Revenue by Product Line

The table below sets forth Digicel’s revenue by product line for the periods indicated. See “Business” for a further description of these product lines.

 

     Year Ended
March 31,
     Impact on Comparative Results
for Period
 
     2015      2014      Amount of
Variation
     Percentage
Change (%)
 
     (in millions, except percentages)  

Revenue by Product Line:

           

Mobile

           

Data/VAS

   $ 761.7       $ 690.1       $ 71.6         10.4   

Voice

     1,677.3         1,831.2         (153.9      (8.4
  

 

 

    

 

 

    

 

 

    

Total Mobile

     2,439.0         2,521.3         (82.3      (3.3

Business Solutions

     119.4         80.6         38.8         48.1   

Cable TV & Broadband

     31.6         11.6         20.0         172.4   

Other Revenue

     63.3         6.4         56.9         889.1   
  

 

 

    

 

 

    

 

 

    

Service Revenue

     2,653.3         2,619.9         33.4         1.3   

Handset/Equipment Revenue

     140.8         133.7         7.1         5.3   
  

 

 

    

 

 

    

 

 

    

Total Revenue

   $ 2,794.1       $ 2,753.6       $ 40.5         1.5   
  

 

 

    

 

 

    

 

 

    

Mobile revenue decreased by $82.3 million, or 3.3%, to $2,439.0 million in the year ended March 31, 2015 from $2,521.3 million in the year ended March 31, 2014. Revenue from data and VAS increased by $71.6 million, or 10.4%, in the year ended March 31, 2015 as the demand for data services continued to increase. Revenue from voice services, which includes transit and inbound roaming revenue, decreased by $153.9 million, or 8.4%, in the year ended March 31, 2015. The majority of this decrease was attributable to the French West Indies, Papua New Guinea, Jamaica, Haiti and El Salvador where, other than in El Salvador, revenue was impacted by the adverse movement of local currencies against the U.S. dollar in the year ended March 31, 2015 and, in the French West Indies and El Salvador, by reductions in mobile termination rates. In addition, the industry wide trend of a substitution of data for voice was also prevalent in Digicel’s markets.

Business Solutions revenue, which is generated from services provided to Digicel’s corporate and governmental customers, increased by $38.8 million, or 48.1%, to $119.4 million in the year ended March 31, 2015 from $80.6 million in the year ended March 31, 2014. This increase was primarily due to Digicel’s continued focus on expanding its offering and customer base in this product line, which includes having dedicated sales teams for these services with a strong focus on its sales pipeline. The increase in Business Solutions revenue in the year ended March 31, 2015 was experienced in numerous markets. Digicel’s revenue from the sale of equipment to Business Solutions customers, which is often at low or negligible margin, is included separately as part of its Handset/Equipment Revenue.

Cable TV & Broadband revenue increased by $20.0 million, or 172.4%, to $31.6 million in the year ended March 31, 2015 from $11.6 million in the year ended March 31, 2014. This increase was primarily due to the acquisitions completed by Digicel during the year ended March 31, 2015. For example, Digicel completed the acquisitions of WIV Cable (April 2014), Telstar (September 2014), SportsMax (September 2014) and Hitron (November 2014) in the year ended March 31, 2015. The FTTH businesses in Jamaica, Trinidad and Tobago and Barbados did not contribute to Cable TV & Broadband revenue in the year ended March 31, 2015, but Digicel expects that they will in future years.

Other revenue was from miscellaneous other sources, including revenue from CPL, the Myanmar Tower business, digital media and mobile advertising, subsea fiber optic cable network, Digicel’s hotel in Haiti and other items. Other revenue increased by $56.9 million, or 889.1%, to $63.3 million in the year ended March 31, 2015 from $6.4 million in the year ended March 31, 2014. Other revenue increased as certain of these businesses

 

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either were not owned by Digicel, such as CPL, or did not generate revenue, such as the Myanmar Tower business, in the year ended March 31, 2014.

Handset/Equipment revenue included (i) amounts charged to customers for the sale of handsets and accessories for a limited number of its subsidiaries that do not use the services of a distributor but manage the sale of handsets to its customers directly, and, as noted above, (ii) revenue generated from the sale of equipment to the Business Solutions customers. Handset/Equipment revenue increased by $7.1 million, or 5.3%, to $140.8 million in the year ended March 31, 2015 from $133.7 million in the year ended March 31, 2014.

ARPU. Digicel’s ARPU per month was $15.3 for the year ended March 31, 2015, compared to $16.0 for the year ended March 31, 2014. The reduction was primarily due to the adverse currency fluctuations in Jamaica, the French West Indies, Haiti and El Salvador as outlined above and continued subscriber growth in markets with lower ARPU such as Haiti and Papua New Guinea.

Direct operating and subscriber acquisition costs. Direct operating and subscriber acquisition costs increased by $10.2 million, or 1.4%, to $753.9 million in the year ended March 31, 2015, compared to $743.7 million in the year ended March 31, 2014. The increase is largely due to cost of equipment sales increasing by $32.0 million, or 28.5%, to $144.3 million in the year ended March 31, 2015 as compared to $112.3 million in the year ended March 31, 2014, as a result of increased equipment sales due to the growth of Business Solutions. The cost of equipment sales includes the cost of equipment purchased by Digicel for sale as part of its Business Solutions business and the cost of handsets purchased directly by Digicel for sale through its distribution channels to Mobile subscribers.

This increase has been offset by lower dealer margin costs (as a result of new retail commission structures introduced by Digicel), which decreased by $22.0 million. As a percentage of total revenue, direct costs (excluding subscriber acquisition costs) were 22.4% for the year ended March 31, 2015 and 22.2% for the year ended March 31, 2014.

Subscriber acquisition costs decreased by $4.6 million, or 3.4%, to $129.0 million in the year ended March 31, 2015 as compared to $133.5 million in the year ended March 31, 2014. Subscriber acquisition cost per unit (excluding SIM only sales) amounted to $29.6 in the year ended March 31, 2015, compared to $30.8 in the year ended March 31, 2014. Subscriber acquisition costs represented 5.3% of Mobile revenue in the years ended March 31, 2015 and 2014. The decrease in subscriber acquisition costs was largely offset by the net increase in other direct costs.

Other operating expenses. Other operating expenses are comprised of network operating costs (consisting of site operating costs, operating lease rentals, network support and software and IT costs) and expenses such as advertising and promotion, professional fees, travel, facilities costs and other expenses. Other operating expenses increased by $66.5 million, or 12.2%, to $610.1 million in the year ended March 31, 2015 from $543.6 million in the year ended March 31, 2014. The increase was largely due to increases in network operating costs, advertising and promotion and foreign exchange losses. The network operating cost increased by $24.7 million, or 10.1%, to $269.6 million in the year ended March 31, 2015 from $244.9 million in the year ended March 31, 2014 primarily due to the expansion of our mobile networks in Papua New Guinea, Haiti and Jamaica , the Myanmar tower business and acquisitions.

Foreign exchange losses increased by $23.0 million, or 359.4%, to $29.4 million in the year ended March 31, 2015 from $6.4 million in the year ended March 31, 2014. Advertising and promotion expenses increased by $6.4 million, or 5.9%, to $115.2 million in the year ended March 31, 2015 from $108.8 million in the year ended March 31, 2014 as a result of increased marketing.

Staff costs. Staff costs increased by $38.3 million, or 13.7%, to $317.0 million in the year ended March 31, 2015 from $278.7 million in the year ended March 31, 2014. As noted earlier, Digicel announced a voluntary

 

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separation program in March 2015 aimed at reducing staff numbers as part of its ongoing efforts to streamline operations and realign its resources to reflect its focus on evolving into a total communications and entertainment provider. Digicel recognized $14.4 million in separation costs in the year ended March 31, 2015 in connection with the voluntary separation program. Excluding these separation costs and the share option costs, which reduced by $4.6 million, underlying staff costs increased by $28.5 million arising primarily from acquisitions in the current year and full year costs for acquisitions completed in the second half of the year ended March 31, 2014.

Depreciation, amortization and impairment of property, plant and equipment and intangible assets. Depreciation, amortization and impairment of property, plant and equipment and intangible assets increased by $10.1 million, or 2.6%, to $405.3 million in the year ended March 31, 2015 from $395.2 million in the year ended March 31, 2014. The increase arises from higher depreciation and amortization charges of $6.6 million and an impairment charge of $3.5 million provided against plant, property and equipment in Vanuatu following the cyclone which hit the island in March 2015.

Operating profit. Operating profit for the year ended March 31, 2015 was $707.8 million, compared to an operating profit of $792.4 million in the year ended March 31, 2014, a decrease of $84.6 million. Excluding voluntary separation program costs, the contributions to operating profit from Trinidad and Tobago and Guyana increased by $6.9 million and $7.4 million respectively. The contributions to operating profit from Papua New Guinea, Haiti, Jamaica and El Salvador decreased by $40.8 million, $4.0 million, $9.7 million and $11.6 million respectively.

Finance income. Finance income relates to interest received on cash deposits. Finance income decreased by $14.2 million to $2.7 million in the year ended March 31, 2015, due to lower average cash balances.

Finance costs. Finance costs include interest expense and other financing costs. Finance costs increased by $94.2 million, or 18.6%, in the year ended March 31, 2015 from $505.1 million in the year ended March 31, 2014 to $599.3 million in the year ended March 31, 2015. This was due in part to an increase in interest expense of $22.7 million from $425.3 million in the year ended March 31, 2014 to $448.0 million in the year ended March 31, 2015. Redemption premiums and deferred financing fees expensed on the redemption of debt, amounting to a total of $88.5 million, were recognized in the year ended March 31, 2015, compared to $22.5 million in the year ended March 31, 2014 and the increase was primarily related to the redemption of $775 million of DGL’s 10.50% Senior Notes due 2018 and the $800 million of DL’s 8.25% Senior Notes due 2017. Financing costs also include foreign exchange losses on loans of $33.6 million during the year ended March 31, 2015, compared to a loss of $17.1 million in the previous fiscal year. Other finance costs decreased by $9.3 million to $22.5 million in the year ended March 31, 2015 from $31.8 million in the year ended March 31, 2014. Digicel expects that the use of proceeds from this offering and the related reduction in its indebtedness will contribute to a lower interest expense in future years.

Share of losses of associate. As of March 31, 2015, Digicel had a 43.59% equity interest in DHCAL (44.97% on a fully diluted basis). The investment has been accounted for as an associated entity using the equity method. Based on Digicel’s proportional interest in DHCAL, Digicel recorded losses of $16.1 million in the year ended March 31, 2015, compared to $4.0 million in the year ended March 31, 2014 against the carrying amount of its loan to DHCAL. Losses from other associates amounting to $5.0 million in the year ended March 31, 2015 relate to Digicel’s share of losses in Boom Financial, Inc. (previously trading as M-Via, Inc.), Aggrego Services LLC and Mobilecover Holdings Pte. Limited.

Taxation. Taxation decreased by $24.9 million, or 11.6%, to $189.0 million for the year ended March 31, 2015 from $213.9 million for the year ended March 31, 2014, due to lower profits in taxable jurisdictions offset by an increase in withholding tax on intercompany royalty charges.

Net (loss)/profit. Digicel’s net loss for the year ended March 31, 2015 was $157.6 million, compared to a net profit of $43.5 million for the year ended March 31, 2014.

 

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Adjusted EBITDA. Adjusted EBITDA for the year ended March 31, 2015 was $1,180.8 million, compared to $1,223.1 million in the year ended March 31, 2014, a decrease of $42.3 million, or 3.5%. While revenue in Papua New Guinea increased in the year ended March 31, 2015, its contribution to Adjusted EBITDA decreased by $31.3 million, or 11.5%, as a result of increased operating expenses associated with the entry into the Cable TV business and increased operating expenses associated with its 300 tower expansion project (with revenues only due to come fully on stream in the year ended March 31, 2016). Jamaica’s contribution to Adjusted EBITDA decreased by $17.5 million, or 9.8%, primarily as a result of currency movement. Trinidad and Tobago’s contribution to Adjusted EBITDA increased by $11.2 million, or 7.4% due to increased data/VAS revenues, business solutions revenues and decreased operating expenses. Guyana’s contribution to Adjusted EBITDA increased by $8.9 million, or 22.3% due to increased voice revenues, data/VAS revenues and a decrease in direct operating and subscriber acquisition costs. The Adjusted EBITDA contributions from all other markets decreased by $13.6 million in the year ended March 31, 2015 due to increased operating expenses associated with the new Cable TV & Broadband and content business. Digicel’s Adjusted EBITDA margin was 42.3% for the year ended March 31, 2015, compared to 44.4% in the year ended March 31, 2014. See “Presentation of Financial and Other Information” for a discussion regarding the use of Adjusted EBITDA as a financial measures and “Summary—Summary Consolidated Financial and Operational Information” for a reconciliation of our net profit/(loss) to Adjusted EBITDA.

Comparison of Years Ended March 31, 2014 and 2013

The following table sets forth certain income statement items for the years indicated:

 

     Year Ended March 31,     Impact on Comparative Results
for Period
 
     2014     2013     Amount of
Variation
    Percentage
Change (%)
 
     (in millions, except percentages)  

Consolidated Income Statement Data:

        

Revenue

   $ 2,753.6      $ 2,777.3      $ (23.7     (0.9

Direct operating and subscriber acquisition costs

     (743.7     (764.7     21.0        (2.7

Other operating expenses

     (543.6     (582.8     39.2        (6.7

Staff Costs

     (278.7     (264.5     (14.2     5.4   

Depreciation, amortization and impairment of property, plant and equipment and intangible assets

     (395.2     (410.6     15.4        (3.8
  

 

 

   

 

 

   

 

 

   

Operating Profit

     792.4        754.7        37.7        5.0   

Finance Income

     16.9        2.9        14.0        482.8   

Finance Costs(1)

     (505.1     (565.0     59.9        (10.6

Share of Loss of Associate

     (7.8     (2.2     (5.6     254.5   

Impairment of Loan to Associate

     (39.0     (176.0     137.0        (77.8
  

 

 

   

 

 

   

 

 

   

Profit before Taxation

     257.4        14.4        243.0        1,687.5   

Taxation

     (213.9     (212.9     (1.0     0.5   
  

 

 

   

 

 

   

 

 

   

Net Profit/(Loss)

   $ 43.5      $ (198.5   $ 242.0        (121.9
  

 

 

   

 

 

   

 

 

   

 

(1) Includes interest expense, financing costs (including redemption premiums) and losses on foreign exchange movements on the revaluation of loans.

Subscribers. Digicel’s total mobile subscribers increased by approximately 4.4% to 13.5 million as of March 31, 2014, compared to 12.9 million as of March 31, 2013. Net additions of subscribers for the year ended March 31, 2014 were 0.6 million (with 0.4 million of this increase relating to Haiti and Papua New Guinea) compared with 0.1 million net additions for the year ended March 31, 2013.

 

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Revenue. Revenue decreased by $23.7 million, or 0.9%, to $2,753.6 million in the year ended March 31, 2014 from $2,777.3 million in the year ended March 31, 2013. Decreases of $55.9 million, $30.1 million and $10.6 million, were attributable to Digicel’s operations in Jamaica, Haiti and El Salvador, respectively. Adverse local currency movements against the U.S. dollar negatively impacted revenue in both Haiti and Jamaica, while Jamaica revenue was also impacted by mobile termination rate reductions. In El Salvador, mobile termination rate reductions and competitive pricing pressures negatively impacted revenue. On a CER basis, revenue increased 3.4% in the year ended March 31, 2014 as compared to the year ended March 31, 2013.

Revenue by Geographic Segment.

The table below sets forth Digicel’s revenue by geographical location for the periods indicated.

 

     Year Ended
March 31,
     Actual Change     Change on a CER Basis  
     2014      2013      Amount of
Variation
    Percentage
Change (%)
    Amount of
Variation
    Percentage
Change (%)
 
     (in millions, except percentages)  

Revenue by Geographic Segment(1):

              

Papua New Guinea

   $ 500.3       $ 489.4       $ 10.9        2.2      $ 66.9        13.7   

Haiti

     497.9         528.0         (30.1     (5.7     (16.7     (3.2

Jamaica

     434.9         490.8         (55.9     (11.4     (6.3     (1.3

Trinidad and Tobago

     260.2         233.4         26.8        11.5        28.5        12.2   

French West Indies

     213.7         211.1         2.6        1.2        (6.1     (2.9

El Salvador

     118.6         129.2         (10.6     (8.2     (10.6     (8.2